SEARCH RESULT -- The Wall Street Journal Interactive Edition

The Wall Street Journal Interactive Edition -- November 27, 1996
Fed Study Bolsters Greenspan's Optimistic Outlook on Economy By DAVID WESSEL Staff Reporter of THE WALL STREET JOURNAL WASHINGTON -- Federal Reserve Chairman Alan Greenspan tells anyone who will listen that the U.S. economy is doing much better than government statistics suggest. Now he has some new Fed-generated research to back him up. Mr. Greenspan argues that official measures also understate the pace at which productivity has been improving. ''With all the extraordinary technological advances of the past couple decades,'' Mr. Greenspan asked in a speech last month, ''why have our recent productivity data failed to register an improvement?'' ALSO AVAILABLE The text of the Slifman-Corrado research. Fed Chairman Alan Greenspan's Oct. 16 speech to the Conference Board. One reason, he said, is that government statistics miss ''major gains ... in the quality, choice and availability of goods and services.'' Another is that it takes a very long time ''for our newest innovations to work their way into the nation's infrastructure in a productive manner.'' A new paper by Fed economists, presented to Fed policy makers at their September meeting but only now available to the public, suggests that actual growth in productivity over the past 20 years may have been half a percentage faster per year than the published data. Growth in productivity, the amount of goods and services produced per hour of work, is key to rising living standards. Government statistics say that labor productivity improved 2.8% a year between 1960 and 1973, but only 1.1% a year since 1973. Mr. Greenspan and the Fed economists don't deny the slowdown, but suggest it has been exaggerated by as much as one-third. Support for a Greenspan View By overstating price increases in some sectors of the economy, Fed economists Lawrence Slifman and Carol Corrado conclude, official statistics have understated increases in production of goods and services. The argument bolsters Mr. Greenspan's frequent assertion that the consumer price index overstates the rate of inflation. One major implication is that the U.S. is now very close to ''price stability,'' the stated goal of the Greenspan Fed, and that, therefore, the Fed doesn't need to raise interest rates to drive inflation down further. ''The fact that Mr. Greenspan believes there are these measurement errors [in inflation and productivity] is one reason he has relaxed this year and hasn't raised interest rates,'' says Robert Gordon, a Northwestern University economist. After dissecting published data, the Fed economists observe that official statistics say that manufacturing efficiency has been improving sharply, but that a number of service industries have become less efficient in recent years. This, they say, ''seems unlikely.'' They doubt statistics that say, for instance, that productivity of hotel workers has been falling at a rate of 1.5% a year or that productivity of health-services workers has been falling at 1.8% a year. The Fed economists take a particularly close look at the partnerships, unincorporated small businesses and nonprofit institutions that account for about one-quarter of all the goods and services produced outside the farm sector. Published government data imply that productivity in these businesses has been dropping since 1973. The fact that profits in these businesses haven't deteriorated suggests otherwise. ''It seems unlikely,'' they say, ''that firms with declining long-term productivity would be able to avoid bankruptcy, let alone maintain the rate of return to the owners.'' Government economists who oversee productivity calculations aren't convinced by the Fed analysis. ''We do not think that research economists have presented clear evidence that productivity growth rates are substantially underestimated,'' said Edwin Dean, associate commissioner for productivity and technology at the Bureau of Labor Statistics. Among other things, he questions the Fed's technique for combining data that the government collects on business production with data collected separately on business income. How the Fed Looks at the Data The Fed argument relies heavily on questioning productivity measures for particular sectors of the economy. Other economists argue that estimates of economywide productivity may still be accurate even if measures for any particular piece are off. Productivity in some service sectors is understated, they say, but productivity in manufacturing may be overstated by a similar amount. For instance, the widely noted trend among manufacturers to contract out for legal work, cleaning services and cafeterias -- all of which are considered services -- may distort sector-specific measures but not the total. ''Efforts to try to determine where the productivity is going up rapidly and where it's going up slowly are doomed to fail,'' says Barry Bosworth of the Brookings Institution. ''Our statistical base is too inadequate.'' Mr. Bosworth adds that he is ''inherently skeptical'' of the Fed work in this area because ''it's very hard in the Federal Reserve to produce an argument exactly contrary to what Greenspan believes.'' But other respected economists say the Fed is onto something important. ''We are doing better relative to other countries than the official data show,'' says Mr. Gordon. ''We're doing better relative to pre-'73 than the official data show. There still is a slowdown, but it's not as severe as government statistics say.'' Economist Martin Baily of McKinsey & Co., who has written about productivity with Mr. Gordon and has served as an adviser to President Clinton, adds that the Fed research helps counteract ''all the people out there saying the U.S. economy is in terrible shape and that things are getting worse, all this doom-and-gloom stuff'' that influences politicians and voters. Mr. Greenspan speaks freely about his view that historical data are too gloomy and that the prospects for the future are rosy. He is much more cautious about whether he thinks the pace of productivity improvement has quickened substantially in the past couple of years, an important issue in determining if the Fed can safely permit the economy to grow faster in the next few years than it has been. Mr. Slifman and Ms. Corrado also avoid taking a position on that issue. Copyright © 1996 Dow Jones & Company, Inc. All Rights Reserved.

The Wall Street Journal Interactive Edition -- November 27, 1996

Fed Study Bolsters Greenspan's Optimistic Outlook on Economy

By DAVID WESSEL
Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON -- Federal Reserve Chairman Alan Greenspan tells anyone who will listen that the U.S. economy is doing much better than government statistics suggest. Now he has some new Fed-generated research to back him up.

Mr. Greenspan argues that official measures also understate the pace at which productivity has been improving. ''With all the extraordinary technological advances of the past couple decades,'' Mr. Greenspan asked in a speech last month, ''why have our recent productivity data failed to register an improvement?''

ALSO AVAILABLE

The text of the Slifman-Corrado research.

Fed Chairman Alan Greenspan's Oct. 16 speech to the Conference Board.

One reason, he said, is that government statistics miss ''major gains ... in the quality, choice and availability of goods and services.'' Another is that it takes a very long time ''for our newest innovations to work their way into the nation's infrastructure in a productive manner.''

A new paper by Fed economists, presented to Fed policy makers at their September meeting but only now available to the public, suggests that actual growth in productivity over the past 20 years may have been half a percentage faster per year than the published data.

Growth in productivity, the amount of goods and services produced per hour of work, is key to rising living standards. Government statistics say that labor productivity improved 2.8% a year between 1960 and 1973, but only 1.1% a year since 1973. Mr. Greenspan and the Fed economists don't deny the slowdown, but suggest it has been exaggerated by as much as one-third.

Support for a Greenspan View

By overstating price increases in some sectors of the economy, Fed economists Lawrence Slifman and Carol Corrado conclude, official statistics have understated increases in production of goods and services. The argument bolsters Mr. Greenspan's frequent assertion that the consumer price index overstates the rate of inflation.

One major implication is that the U.S. is now very close to ''price stability,'' the stated goal of the Greenspan Fed, and that, therefore, the Fed doesn't need to raise interest rates to drive inflation down further. ''The fact that Mr. Greenspan believes there are these measurement errors [in inflation and productivity] is one reason he has relaxed this year and hasn't raised interest rates,'' says Robert Gordon, a Northwestern University economist.

After dissecting published data, the Fed economists observe that official statistics say that manufacturing efficiency has been improving sharply, but that a number of service industries have become less efficient in recent years. This, they say, ''seems unlikely.'' They doubt statistics that say, for instance, that productivity of hotel workers has been falling at a rate of 1.5% a year or that productivity of health-services workers has been falling at 1.8% a year.

The Fed economists take a particularly close look at the partnerships, unincorporated small businesses and nonprofit institutions that account for about one-quarter of all the goods and services produced outside the farm sector. Published government data imply that productivity in these businesses has been dropping since 1973. The fact that profits in these businesses haven't deteriorated suggests otherwise. ''It seems unlikely,'' they say, ''that firms with declining long-term productivity would be able to avoid bankruptcy, let alone maintain the rate of return to the owners.''

Government economists who oversee productivity calculations aren't convinced by the Fed analysis. ''We do not think that research economists have presented clear evidence that productivity growth rates are substantially underestimated,'' said Edwin Dean, associate commissioner for productivity and technology at the Bureau of Labor Statistics. Among other things, he questions the Fed's technique for combining data that the government collects on business production with data collected separately on business income.

How the Fed Looks at the Data

The Fed argument relies heavily on questioning productivity measures for particular sectors of the economy. Other economists argue that estimates of economywide productivity may still be accurate even if measures for any particular piece are off. Productivity in some service sectors is understated, they say, but productivity in manufacturing may be overstated by a similar amount. For instance, the widely noted trend among manufacturers to contract out for legal work, cleaning services and cafeterias -- all of which are considered services -- may distort sector-specific measures but not the total.

''Efforts to try to determine where the productivity is going up rapidly and where it's going up slowly are doomed to fail,'' says Barry Bosworth of the Brookings Institution. ''Our statistical base is too inadequate.'' Mr. Bosworth adds that he is ''inherently skeptical'' of the Fed work in this area because ''it's very hard in the Federal Reserve to produce an argument exactly contrary to what Greenspan believes.''

But other respected economists say the Fed is onto something important. ''We are doing better relative to other countries than the official data show,'' says Mr. Gordon. ''We're doing better relative to pre-'73 than the official data show. There still is a slowdown, but it's not as severe as government statistics say.''

Economist Martin Baily of McKinsey & Co., who has written about productivity with Mr. Gordon and has served as an adviser to President Clinton, adds that the Fed research helps counteract ''all the people out there saying the U.S. economy is in terrible shape and that things are getting worse, all this doom-and-gloom stuff'' that influences politicians and voters.

Mr. Greenspan speaks freely about his view that historical data are too gloomy and that the prospects for the future are rosy. He is much more cautious about whether he thinks the pace of productivity improvement has quickened substantially in the past couple of years, an important issue in determining if the Fed can safely permit the economy to grow faster in the next few years than it has been. Mr. Slifman and Ms. Corrado also avoid taking a position on that issue.