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Wednesday, December 07, 2005

US Productivity and Earnings Data

The US labour productivity grew by a robust 4.7% annualised in the third quarter, which seems to suggest that the US economy can continue to grow at a rapid pace without sparking inflation. This seems to have impications for decisionas at the Federal reserve.

"The minutes of the Fed’s last meeting in November suggested that the central bank believes that interest rates are approaching a neutral stance – a level at which they neither encourage nor restrict growth. Once this point is reached, further interest rates will be necessary only if inflationary pressures intensify, economists believe.

The Fed is widely expected to raise rates from 4 to 4.5 per cent before considering a pause. But there is less certainty about whether rates will need to rise in March, when the first meeting of the Fed’s Open Market Committee chaired by Ben Bernanke will be held.

Quite why US productivity is so good - in particular in comparison with its eurozone rivals, still remains something of a mystery. If it was simply ICT, then the eurozone countries who are introducing ICT components just like everyone else should have been showing signs of 'catching up'.

Productivity growth in the US has eclipsed the performance of other leading economies over the past six years, allowing the Fed to permit levels of economic growth that would previously have forced it to apply the brakes through higher interest rates. Economists have been expecting growth in productivity to slow from its peak at the end of 2003. But the slowdown has been much less abrupt than forecast.