For much of last year, the consensus among Wall Street economists was a recession was imminent. Instead, we had healthy economic growth, low unemployment, declining inflation rates and strong stock market performance.
The quip "prediction is difficult, especially about the future" is attributed to many people, including humorist Mark Twain, baseball player Yogi Berra, and physicist Niels Bohr. No matter who said it first, the insight is certainly accurate.
Rather than foraying into the economic prediction business in this column, I want to suggest paying close attention to the trajectory of an economic number that doesn't garner enough consideration: productivity growth. Briefly, productivity means doing more with less or working smarter. Productivity growth is a key measure of economic prosperity, job creation, innovation and quality of life for individuals and society.
Until recently, productivity growth has been deeply disappointing. Despite enormous strides in the digital economy, productivity growth through the past 15 years averaged a lackluster 1.4%. That is, until recently.
The most recent numbers are impressive. Productivity growth for the last three quarters came in at 3.6%, 4.9% and 3.2%. The productivity numbers are erratic, yet there are good reasons to think much of the recent gains are sustainable. Mark Zandi, chief economist at Moody's Analytics, highlighted how productivity increases reflect strong business investment in labor-saving information processing equipment and software as well as the productivity promise of remote work and artificial intelligence.
A "fireside chat" with Donald Luskin, founder of TrendMacro, at the recent CFA Society of Minnesota annual dinner reminded me of the importance of paying attention to productivity. (There was no fireplace but a colorful bouquet of flowers instead.) The CFA Society of Minnesota is one of the oldest chapters of the CFA Institute, issuer of the chartered financial analyst designation.
During his remarks, Luskin made a compelling case for inflation turning into mild deflation — a decline in the overall price level — later this year. He also stressed in his analysis why improvements in productivity weren't ephemeral after emerging from the dramatic economic trauma of the pandemic. In addition to the workforce and business investment gains achieved during the pandemic disruption, he sees the rise of artificial intelligence boosting productivity in the long haul.
Personally, I think productivity optimism is the right call. Nevertheless, for a read on the economy's underlying long-term prospects for better or worse, follow the trend in productivity growth.
Chris Farrell is senior economics contributor, "Marketplace"; commentator, Minnesota Public Radio.