Lessons from the US growth resurgence

The unusual combination of more rapid growth and lower inflation in the United States from 1995 to 2000 touched off a strenuous debate among economists about whether improvements in US economic performance could be sustained. Despite the recent slowdown in the economy in general and in information technology (IT) in particular, this debate has given way to a broad consensus that IT is the key to understanding the American growth resurgence and recent research has turned to the future of productivity growth. In this paper we review the most recent evidence on growth in the United States and present a model for projecting future productivity growth. Our primary conclusion is that, despite downward revisions to the gross domestic product (GDP) and investment in the annual revisions of the US National Income and Product Accounts (NIPA) in July of 2001 and 2002, the US productivity revival remains intact with IT as the predominant source. The story begins with an increase in total factor productivity (TFP) growth in the IT-producing sectors (computer hardware, software, and telecommunications), which led to falling relative prices and induced capital deepening in IT equipment. These two contributions account for a majority of the acceleration in labor productivity growth after 1995.