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Atlanta Fed President Lockhart: Labor Productivity a Key to Growth

Atlanta Fed President LockhartWhen the Federal Open Market Committee (FOMC) decides to cut back on its large-scale asset purchases of $85 billion a month, that decision will be grounded in the performance of the nation's economy, Atlanta Fed President Dennis Lockhart said during an August 13 speech at the Kiwanis Club of Atlanta.

Financial market participants and the public generally are eager to know what the FOMC plans to do regarding its asset-purchase program. So far, though, the economy's uneven progress has not allowed the FOMC to communicate clearly about when and how much it might reduce the asset purchases, which are widely known as quantitative easing, or QE, Lockhart noted. The current round of purchases is known as QE3.

Job growth, slow GDP growth muddy the water
Lockhart said the recent data present an unclear picture. "One feature of the data in hand that contributes to a lack of clarity is the fact that employment gains have been strong enough to lower the unemployment rate while GDP [gross domestic product] growth has remained lackluster," he said. "As a matter of arithmetic, healthy employment growth coupled with tepid GDP growth implies weak labor productivity growth. And in fact, productivity growth in recent quarters has been significantly below historical norms."

Productivity grew in the early months of the recovery. Whether labor market productivity will improve again soon is a matter of debate. Some experts think the country is in for a long period of slow productivity gains because of a lack of major technological advances, Lockhart explained. In contrast, he said he and others view the recent dip in productivity growth as likely a temporary pause.

How to increase productivity
There are a couple of basic ways to increase productivity. One is by squeezing more efficiency out of the existing workforce, and not hiring more people, which is what happened early in the recovery. Another way to stimulate productivity is through capital spending, which appears to be on the rise, Lockhart pointed out.

"If productivity growth rebounds to more typical levels, the coincidence of job gains at a pace of around 190,000 per month in recent months and GDP growth below 2 percent cannot persist," he remarked. "Again, it's a matter of arithmetic. Either GDP growth will rise to levels consistent with recent employment growth, or employment growth will fall to levels more consistent with the weak GDP data we've been witnessing."

The Atlanta Fed's outlook calls for some improvement in the economy, powered by consumer spending, business investment, and the housing market. Lockhart cautioned, however, that he has concerns that the data in coming weeks could be ambiguous and even disappointing.

A cautious first step
Lockhart noted the first adjustments to asset purchases, when they occur, should be thought of as a cautious first step in a process that will unfold as the direction of the economy becomes more certain. "The rolling outlook from here is what really matters in making future decisions on asset purchases," he said. "I will need to get comfortable that the employment progress we've enjoyed is not stalling and that disinflation pressures are not building."

Lockhart also emphasized the progress that's been made in economic fundamentals, including the unemployment rate, since the launch of QE3 just under a year ago.

August 28, 2013


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