From 2000-2005, U.S. trend productivity growth is estimated to have accelerated again, as I mentioned, to around 3 percent. But productivity growth in the tech industry itself slowed down, and so did investment in tech equipment by firms that use it. Why, then, did productivity growth surge in this period, and what does the answer imply for productivity going forward? Here the stories are not so clear. One explanation begins with the notion that investment itself is disruptive, since firms have to divert resources to installing and learning to use the new capital...
Another explanation for the productivity surge in 2000-2005 is that it reflected severe profit pressures that forced firms to cut costs by restructuring, engaging in mergers, and so on. Insofar as this explanation is at work, the cost-cutting resulted in one-time productivity gains and has not sown the seeds for faster productivity growth going forward.
Both explanations, then, are consistent with the possibility that trend productivity growth has slowed. However, I don’t want to overstate the degree of any possible slowing. We are still talking about trend growth going from about 3 percent in 2000 to 2005—the figure I cited earlier—to between 2 and 2½ percent now. So, productivity growth still would be reasonably strong, just not as strong as over the prior decade. As I said, a lower trend rate of productivity growth would help explain the sluggishness in business investment and put upward pressure on inflation for a time.