Economic speed limit may have fallen: Bernanke
8/31/2006 2:52:32 PM
By David Lawder
GREENVILLE, South Carolina (Reuters) - The U.S. economy's noninflationary speed limit has likely dropped due to slower labor force growth, but productivity should stay strong, Federal Reserve Chairman Ben Bernanke said on 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, pointing at an aging population, a leveling off of women entering the labor pool, and a decision by 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 looked set to remain strong for some time.
"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 impact of slower labor force growth against the big strides in labor productivity, or worker output per hour.
The Fed chief acknowledged 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 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 percent a year -- in line with the rapi
d 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 percent a year.
GET A GRIP ON IT
Bernanke, who did not touch directly on the outlook for Fed policy, noted the price of computing power was continuing to drop sharply and was leading to advances in other fields -- two factors that would tend to push productivity higher.
In addition, he said productivity should also get a lift as existing technologies become more widely used.
While investment in new technologies had slowed from its breakneck 1990s pace, businesses had been making "intangible investments" -- such as in worker training -- that allowed them to become more efficient, he said.
"The concept of intangible capital may shed light on the puzzle of why productivity growth has remained strong despite the deceleration in (information technology) investment," Bernanke said.
He added that investing in U.S. labor force skills would be "particularly important" in coming years, and said the way intangible investments were treated in official data meant U.S. saving and investment may be "significantly understated."
CORE MISSION
In taking questions, Bernanke defended the Fed's strategy of focusing on core measures of inflation amid energy price spikes as it labored to keep overall inflation under wraps.
"It's very difficult to eliminate the inflationary impact of the immediate effect of an increase in energy prices," he said. "Doing so would require forcing down wages and other prices quite dramatically."
Instead, the Fed sought to prevent energy price gains from feeding through into other prices. "If we can keep core inflation stable ... it suggests that in the longer term we'll stabilize overall inflation as energy prices eventually stabilize," Bernanke said.
Some economists, including Bank of England chief economist Charles Bean, have criticized the U.S. central bank's approach. Bean told a forum last weekend such a strategy risked denting the Fed's inflation-fighting credibility.
