Smith Faculty Opinion Article

August 7, 2008

By Dr. Peter Morici, Professor of International Business
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 Peter Morici

Friday’s Productivity Report

Friday the Labor Department will release preliminary data for second quarter productivity growth. The consensus forecast is for a 2.5 percent increase in nonfarm business productivity, and my forecast is for a 2.7 percent.

Preliminary estimates indicate GDP grew at 1.9 percent in the second quarter, even as the private sector shed 293,000 jobs. For that to be accomplished, productivity should have continued to advance at brisk pace. First quarter nonfarm business productivity growth was 2.6 percent.

Rising productivity is critical to keep domestic inflation in check at a time of rising energy and commodity prices. Higher labor productivity permits businesses to absorb more of those costs without marking up prices too much. Of course there are limits to this calculus but rising productivity helps.

Wage increases have been reasonably subdued, oil prices have receded in recent weeks, and other commodity supplies will likely be under less pressure as growth slows in the United States and abroad in the second half.

Overall, inflation should moderate by year end. This would permit the Federal Reserve to focus its energy on fixing credit markets and establishing the foundation for an economy recovery.

Patience will be required. Major money center banks have been slow to acknowledge the scope of losses from bad mortgage, credit card and auto loans and fix faulty business practices. Bank leaders such as John Thain and Vikram Pandit at Merrill Lynch and Citigroup have been reluctant to implement meaningful management reforms, many senior bankers have escaped personal responsibility for actions that victimized shareholders and bondholders, and large banks increasingly find fixed income investors increasingly reluctant to trust the large banks with their money.

Consequently, solid business customers and worthy home buyers continue to face difficulties getting loans. Without an ample supply of bank credit, home sales cannot recover, and the economy cannot resume normal growth. The economy is not likely to grow at its potential of 3 to 3.5 percent on a sustained basis until 2010, perhaps later.

Peter Morici is a professor at the Robert H. Smith School of Business and former Chief Economist at the U.S. International Trade Commission.                                                          ►More Faculty Opinion Articles