There’s a lot good to report about the American economy, now well into its record 11th year of expansion. Unemployment is low, and real wages are rising. And as I recently wrote in my The Week column, “Look, if you’re a president who promised to make America great again, and the unemployment rate falls to its lowest level since the early 1950s, it arguably looks like you’re making American great again.” Indeed, Goldman Sachs is predicting the unemployment rate to will “fall to levels last seen during the Korean War, bringing a further pickup in wage growth to 3.5 percent.”
But one worrisome weak point continues to be uninspiring productivity growth. Productivity has risen at a so-so 1.4 percent annual rate over the past two years, up from an abysmal average of just 0.6 percent in the 2011-2016 period. Faster productivity growth boost overall GDP growth and means faster wage growth, as well. That said, productivity growth may be stronger than the data suggest. This from Capital Economics:
Recent payroll employment growth is likely to be revised down in the annual revision early next year, which is unquestionably a negative. But the flip-side is that productivity growth must have been stronger than the current data suggest. …If the acceleration productivity growth continues, the economy’s sustainable growth rate could be higher than most currently assume. By keeping unit labour cost growth in check, stronger productivity would also make it even more likely that the economy will benefit from an extended period of loose Fed policy.
This article by James Pethokoukis first appeared in 2019 on the AEI Ideas blog.