Pumped Up Prices and Productivity

August 16, 2007

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Energy prices are up, the Producer Price Index is up, and consumer imports have fallen. The trade gap dropped slightly in May, and exports rose in the first half of 2007. Can manufacturers support the economy until housing can help next year? And will IT play a significant role?

A United States Department of Labor survey found that a jump in energy prices last month "caused inflation at the producer level to rise, despite falling food prices and small prices increases for many other goods," The New York Times reports, adding that the cost of electricity rose 1.8 percent and the cost of natural gas was up 2.7 percent last month. The cost of gasoline was up 3.2 percent during the same period (July).

Meanwhile, the Producer Price Index for Finished Goods advanced 0.6 percent in July, seasonally adjusted, the Bureau of Labor Statistics (BLS) reports. This increase followed a 0.2-percent decline in June and a 0.9-percent rise in May.

Producer prices rose 4 percent from July 2006 to July 2007, and 2.3 percent excluding food and energy, and, on top of this, the BLS points out that the percentage change of output per hour in the manufacturing sector dropped from 1.7 in the first quarter to 1.6 in the second quarter.

Last year, the percentage change of output per hour in the manufacturing sector dropped from 4.0 to 3.7 in the same quarters.

Regarding output per hour in manufacturing, the overall scene looks like progress continues, as noted by the St. Louis Federal Reserve.

Moreover, Bloomberg News reports:

Growth of productivity increased at only about 1.25 percent annual rate in the first half of this year at non-farm businesses. It was also revised down for each of the past three years, based on new estimates of gross domestic product increases released by the Commerce Department last month.

Also, there will not likely be help via an interest cut from the Fed. "We have a low unemployment rate; we have solid consumer spending; we have torrid export activity; we have increased manufacturing. And these clearly suggest the economy is in no need of stimulus," Richard Yamarone, director for Argus Research, told the Times.

Given the situation, what can manufacturers use to gain market share and prosper? Boost productivity and innovate.

On that, the Information Technology & Innovation Foundation (ITIF) says that raising productivity can often come from information technology (IT). According to a recent ITIF report, entitled Digital Prosperity: Understanding the Economic Benefits of the Information Technology Revolution, IT adds $2 trillion dollars annually to the U.S. economy and "is responsible for nearly all of the pickup in economic growth over the last decade."

IndustryWeek notes of the report:

The economic effects of IT are a combination of the productivity growth of IT companies with the productivity attributable to IT in other sectors from agriculture to manufacturing, demonstrating that technological progress is in a large part responsible for reversing a 20-year slowdown in productivity from the mid-1990s, as well as two-thirds of total productivity growth in the U.S. between 1995 and 2002.

Yet while IT productivity's impact is the highest in the U.S., most other nations have benefited from the IT revolution, as well. According to IndustryWeek, China's IT usage was responsible for "38 percent of total productivity growth and 21 percent of GDP growth."

Resources

Producer Prices and Trade Data Give Fed Little Reason to Cut Rates by Jeremy Peters The New York Times, Aug. 15, 2007

Manufacturing Sector: Output Per Hour of All Persons St. Louis Federal Reserve, Aug. 7, 2007

Fed Notes Market Turmoil, Sticks to Its Guns by John Berry Bloomberg News, Aug. 8, 2007

Productivity and Costs, Second Quarter 2007 U.S. Department of Labor Bureau of Labor Statistics, Aug. 7, 2007

Major Sector Productivity and Costs Index (Manufacturing) U.S. Department of Labor Bureau of Labor Statistics, Aug. 14, 2007

Digital Prosperity; Understanding the Economic Benefits of the Information Technology Revolution by Robert Atkinson and Andrew McKay Information Technology & Innovation Foundation, March 2007

IT "Main Driver" of Productivity Growth by Brad Kenney IndustryWeek, March 23, 2007

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