June 15, 1999


The latest issue of the New York Fed’s Current Issues in Economics and Finance, The Impact of Reduced Inflation Estimates on Real Output and Productivity Growth -- is enclosed for your review.

Author Charles Steindel finds that recent measures of output and productivity growth fall short of their 1960-73 averages, despite posting their strongest performance in many years. Even when adjusted to account for data-gathering and measurement problems, these widely tracked U.S. growth indexes fail to match their earlier rates, according to Steindel.

Steindel, a senior vice president in the Bank’s business conditions area, notes that since 1996, productivity growth rates have shown the strongest sustained performance since the mid-1980s’. Although this trend in one of the most closely followed U.S. growth indexes points to an improvement in the economy, the post-1996 average productivity growth of nearly two percent is still well below the nearly three percent average that prevailed from 1960 to 1973, says Steindel.

Steindel asks why current growth has not matched earlier rates and examines whether the answer lies in problems associated with their measurement. He questions the accuracy of the current growth rates, in part, because the data-gathering systems often use survey samples that are small and somewhat out of date.

Steindel also suggests that an overstatement of inflation may be compounding the difficulties, because an increase in reported inflation decreases the rates of real GDP and productivity growth. Such an overstatement may be especially important, he adds, in certain hard-to-measure services, such as medical care and financial services. These services are inherently hard to price and their nature has changed dramatically with the introduction of new technologies.

In support of his main finding, Steindel shows that:

  • Hard-to-measure services have accounted for a greater share of GDP over the years, and reported inflation has indeed been higher in these services than in other sectors of the economy.
  • Reduced estimates of the rate of inflation in hard-to-measure services do raise recent GDP and productivity growth rates.
  • GDP and productivity growth rates still would have been much lower in recent years than in the 1960-73 period – even if an overstatement of inflation in the hard-to-measure services had started after 1973.

Contact: Douglas Tillett

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