Fresh jolt to American economy

Latest productivity figures will undermine US 'miracle' and fuel fears of 'double-dip' recession.

US figures for productivity will slide this week, suggesting a relapse of the world's biggest economy into a 'double dip' recession, and the possibility of further rate cuts from the US Federal Reserve. Historical revisions to data are also set to belie the idea that the US economy outperformed structurally in the past half-decade.

'This week will probably rub away the productivity miracle, and we will find a large part of it was a statistical mirage,' says Professor Avinash Persaud, global head of research at State Street Bank.

The figures, due on Friday, will show that quarter-on-quarter growth in US non-farm productivity slumped to about 1 per cent in the second quarter of this year, compared with 8.4 per cent in the previous quarter.

Those first-quarter figures underpinned the belief that the structural flexibility of US businesses would see its economy power into very strong recovery during this year. But economists expect that figure and a slew of previous figures to be revised downwards, after last week's surprisingly poor GDP data.

'The weaker quarterly figures mean US GDP grew only 0.3 per cent last year, rather than the 1.2 per cent that was previously estimated. This and other revisions raise all sorts of questions with respect to estimates of trend US growth and trend US productivity growth,' says David Hillier of Barclays Capital.

Last week's poor growth, sluggish job creation and souring consumer confidence figures sent US investors running scared. But productivity numbers are of longer-term importance. The seemingly stellar productivity boom anchored much of the capital investment and share market confidence that propelled the US economy in the late 1990s.

Even after the revisions, average annual productivity growth from 1996-2002 will be around 2.6 per cent, says Lehman Brothers, double the trend rate of the previous two decades but no greater than European productivity.

'For the past few years the US authorities have been lording over us about the superiority of the US economic model. I think we'll find Europe has performed just as well,' says Persaud.

Much of the superior US productivity performance has been down to demographics and immigration. A recent Office for National Statistics report showed that, if the UK used the US method of 'hedonic quality adjustments', British productivity would be 0.5 percentage points higher.

'Look at the per worker per hour measure and you find that, despite so-called "eurosclerosis", European productivity has been as high as the US's,' says Persaud.