Is America Really Suffering a ‘Great Stagnation’? Why Goldman Sachs is Skeptical


When economists talk about America suffering a “great stagnation,” that is the conclusion they draw from the data represented in these two charts, via a new Goldman Sachs research note:



The two charts basically show a multi-decade slowing in US productivity growth, except for a pop in the mid-1990s through the mid-200os. If there was going to be a big technology-driven productivity and innovation surge from the Information Technology revolution, it seems to have come and gone during the second Clinton term and first Bush II term. One could blame the Great Recession, of course. But the downshift began before the downturn and continues six years into recovery. And Goldman is very disappointed, offering this gloomy forecast (bold is mine):

The IT contribution [to productivity]  has fallen back to levels last seen in the early 1980s, and measured productivity growth has averaged 1½% over the past decade (and just ½% over the past three years). For analysts who had held onto the view that at least part of the weakness was a cyclical and temporary consequence of the deep slump in output and capital accumulation, such as ourselves, the recent numbers have been a clear disappointment. On the back of this disappointment, we have reduced our working estimate for long-term productivity growth from 2% to 1½%, which takes us back to the average pace of the 1973-1995 period.

This is really important. Slower productivity growth means living standards rise more slowly. But there’s a catch here: Goldman thinks that while the official numbers show an IT-led productivity slowdown, other metrics do not: “Profit margins have risen to record levels, inflation has mostly surprised on the downside, overall equity prices have surged, and technology stocks have performed even better than the broader market.” It was just the opposite when the productivity slowdown began in the 1970s.

Maybe metrics devised for a wheat-and-steel economy of physical commodities are poorly suited for one experiencing rapid growth in software and digital content. Maybe there is a systemic understatement of productivity and GDP growth:

But is the weakness for real? We have our doubts. … Specifically, we see reasons to believe that the well-known upward biases in the inflation statistics related to quality changes and the introduction of new products are particularly severe for software and digital content. Quantifying the effects is difficult, but it is not unreasonable to think that they could offset a substantial portion of the measured productivity slowdown. … How much better are the inventory management systems that retail companies contract out or develop for their own account compared with those of twenty years ago? How much better is Grand Theft Auto V than Grand Theft Auto IV? And how much more value do we now derive from our internet connection compared with a decade ago? It is very difficult for a statistician to know, and when we do not know our default assumption tends to be that there is little change.

Mismeasurement of inflation has probably for years understated real GDP and income growth. But the IT revolution has likely made that understatement a worse and growing problem. (Goldman’s conclusion is also very much sync with the innovation and productivity research of AEI’s Stephen Oliner.) Now, even if Goldman is correct —  and one should should “be skeptical of confident pronouncements that the standard of living is growing much more slowly than in the past” — nothing here argues for complacency. Some pretty smart people are still worried about “economic calcification.” In any event, slowing labor force growth will make it tougher to generate fast economic growth without higher productivity and increased innovation. We should still reform taxes and regulation to help entrepreneurs, immigration law to attract more brainiacs, and invest more in basic science research. But things overall may be better than we think, and strong job numbers may be a better gauge of the economy than anemic GDP numbers.

Also: 2 views on why US economic growth is better than we think — and has been for awhile

Published in Economics
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  1. user_1008534 Member

    Re : “…strong jobs numbers…”

    Huh? Strong jobs numbers?!?!? FULL TIME EMPLOYMENT DECLINED BY 252,000 IN APRIL!

    I know I have been banging this drum for a long time. But it remains true. And it remains un-addressed.

    Whenever we are talking about the health of the economy, my go-to number is “Employed-Usually Work Full Time.” Full time jobs are the kind of jobs that give an employee the opportunity to build a life around. Part time employment, not so much. This number comes from the Household Survey. The Household Survey is the same data set used to calculate the official Unemployment Rate. So the data is unimpeachable. The most recent report shows that Full Time Employment declined from a level of 121,024,000 in March to 120,772,000 in April. A LOSS of 252,000 Full Time jobs. (You can easily find this number yourself at the user friendly St. Louis Fed’s FRED site. Look for data series LNS12500000)

    A bit of history. Full Time employment peaked in November 2007 at a level of 121,875.000. That’s right. The economy has yet to generate the number of Full Time jobs that we last saw over seven years ago. Currently, we are over 1.1 Million jobs short of where we were in November 2007!!! And this is without trying to adjust for the additional population growth of over 17 Million since November 2007.

    Six full years of the Obama economy with trillions of dollars in additional debt and trillions more in Fed-provided QE funds, yet we are still short over one million full time jobs from where er were in 2007! Wondering about the decling median income in America? Curious about enemic GDP? Look no further.

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