WASHINGTON – Federal Reserve Chairman Ben S. Bernanke and his colleagues are suffering through their own form of cognitive dissonance: revealing new concerns about the economy’s long-term prospects even as they forecast faster growth in 2014.
Worker productivity, a key component of an economy’s health, has risen at an annual clip of 1 percent during the last four years, as the U.S. has struggled to recover from the worst recession since the Great Depression. That’s less than half the 2.2 percent average gain since 1983, according to data from the Labor Department in Washington.
“Slower growth in productivity might have become the norm,” the central bankers noted at their Oct. 29-30 meeting, according to the minutes released last week. That’s a switch from past comments by Bernanke that the deceleration probably was temporary and would end as the expansion continued.
A combination of forces may be at work. Chastened by the deep economic slump, corporate executives have reduced spending plans for factories, equipment, research and development. Startup businesses have been held back as would-be entrepreneurs find it harder to get financing from still-cautious lenders. And out-of-work Americans have seen their skills atrophy the longer they’re without jobs.
“We’re in a slow-growth period of unknown duration,” said Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel prize in economics.
In his latest book, “Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change,” Phelps argues that the U.S. has become sclerotic as entrenched corporate interests have stifled innovation.
A lasting decline in the growth of productivity, or nonfarm business output per employee hour, would be bad news for the economy. Its potential - the ability of the U.S. to expand over an extended period without generating inflation - is determined by the sum of growth in the labor force and of productivity. A slowdown in the latter would limit how fast the U.S. can develop in the future.
That, in turn, would have far-reaching implications for policy makers, company executives, working Americans and investors. Fed officials would need to be more alert to inflation risks if growth picked up. Lawmakers would face even more difficulties reducing the budget deficit because tax receipts would be lower. Companies might have to settle for reduced revenue, employees for smaller paychecks and investors for diminished returns as a result of the slower expansion.
“The expected future return of equities is about 4 percent a year” over the next decade, Ray Dalio, founder of Bridgewater Associates LP, a $150 billion hedge fund based in Westport, Conn., said at a Nov. 12 DealBook conference in New York.
U.S. stocks have gained about 25 percent annually, including dividends, since reaching a 2009 low, as the Fed has kept its benchmark interest rate near zero and corporate profits have risen.
Northwestern University Professor Robert Gordon has argued that the spurt in productivity associated with the computer and Internet revolution is over and as a result, the U.S. will be consigned to a long period of “dismal” growth. He predicted last year that between 2007 and 2027, gross domestic product per capita will rise at the slowest pace of any 20-year period in U.S. history going back to George Washington.