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Bernanke Upbeat on Productivity

The Federal Reserve chairman says output growth may moderate as the U.S. labor force expands more slowly.

September 01, 2006|From Reuters

GREENVILLE, S.C. — The pace at which the U.S. economy can grow without creating inflation has probably dropped as a result of slower labor force growth, but productivity should stay strong, Federal Reserve Chairman Ben S. Bernanke said Thursday.

"The share of the population working or looking for work looks to be on a downward track over the long term," Bernanke told a luncheon crowd during an economics conference, pointing at an aging population, a leveling off of women entering the labor pool and a tendency for young people to stay in school longer.

But he presented a largely upbeat view of the economy's future, saying the pace at which the economy's efficiency was increasing was likely to remain strong.

"A reasonable estimate is that productivity growth should continue at something like the level we saw between '95 and 2000 -- that is, at a healthy level -- and that will promote increased potential output," Bernanke said.

"The net-net of all this is that potential output growth ... will probably be somewhat slower in the future," he said, weighing the effect of slower labor force growth against the strides in labor productivity, or worker output per hour.

The Fed chief acknowledged that recent data revisions had led some economists to mark down estimates for trend productivity growth -- a key ingredient in rising living standards -- but said the fact that productivity gains had remained strong suggested they reflected long-term developments.

"The recent experience does not appear to require a significant rethinking of long-term productivity trends," Bernanke said, citing recent estimates by leading economists that put the trend rate at roughly 2.5% a year -- in line with the rapid growth seen in the 1990s boom.

Economists said Bernanke's remarks suggested he believed the economy's noninflationary speed limit still lay somewhere north of 3% a year.

Bernanke, who did not touch directly on the outlook for Fed interest rate policy, noted the price of computing power was continuing to drop sharply and was leading to advances in other fields -- two factors that tended to push productivity higher.

In addition, he said productivity should get a further lift as existing technologies are more widely used.

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