Productivity Bodes Well

September 22, 2006
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HUDSONVILLE —  Productivity is booming, business investment is booming, the tax rate is low and the Federal Reserve is still not too tight in its monetary stance, so economist Brian Wesbury just can’t “get negative’ on the state of the nation’s economy.

Wesbury believes that the holy grail of economics is productivity, and that productivity is growing faster in the United States today than it ever has before — even faster than during the Industrial Revolution.

People underestimate productivity’s worth, but without it, the country cannot create wealth, he said.

“When you step back and look at the groundwork that we’re standing on — what’s really driving our economy over the last term — you can’t come away but realizing we’re in the midst of something very special; we are in the midst of massive change,” Wesbury told more than 300 business people gathered Tuesday at the Pinnacle Center for Mercantile Bank of Michigan’s 3rd Annual Economic Seminar.

Wesbury, chief economist at First Trust Advisors LP, is a columnist and economics editor for American Spectator magazine, a contributor to the Wall Street Journal editorial page, and a regular guest on CNBC and Bloomberg TV.

Massive change is being fueled by innovative technologies, and they’re coming together around the world in health care, in pharmaceuticals, in services, and in computers and the Internet, he said.

“Technology is amazing. The free market is amazing,” Wesbury said. “When we’re talking about productivity, what we’re always trying to do is get more for less. My belief is that the productivity gains that we’re seeing today are not only massive but they are transforming, and, in fact, are throwing off tremendous amounts of wealth. So it’s really hard for me to get pessimistic about the economy today given this growth in productivity.”

Another reason for his optimism is business investment — 13 straight quarters of it. He’s also optimistic about the Federal Reserve’s current stance.

“The Fed is not tight in its monetary policy; it’s just not loose. We have a little bit of an inflation problem, but not much,” he commented. “Core rates of inflation, excluding energy and food, are running at about 3 percent today.”

There’s a magic interest rate called the “neutral” interest rate; it’s the perfect rate, the natural rate that doesn’t cause inflation but doesn’t hurt the economy, Wesbury explained.

He estimates the neutral rate as the two-year change in the average growth rate of spending in the economy, and by that estimation, the top line revenue growth rate for the entire economy is now 7 percent.

According to Wesbury, interest rates are low today; they’re only high when compared with what they were a few years ago, which was “absurdly low,” he said. “The people who say rates are too high are Realtors.”

A lot of people are concerned about the fate of the housing market. As Wesbury pointed out, home sales jumped significantly between 2001 and 2003 due to “absurdly low” interest rates.

“It pushed housing up dramatically above trend. Now that interest rates have moved back to more normal levels, we’re going through a correction and housing is coming back down toward trend. Typically, when something goes over trend, it tends to go under trend for a while and try to make up for that.”

Housing starts are down 26 percent from their peak of last year, but are still 5 percent above where they were at the tail end of the boom period of the late 1990s. Housing is going to slow down and probably stay slower for a little while, but it’s not a collapse that will end the economic recovery, he said.     

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