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Productivity surges; 'new economy' lives

Per-worker output hits a 19-year high in first quarter. Tech spending is one reason.

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Federal Reserve Chairman Alan Greenspan has long been a poster boy for the "new economy" – a place where new technology enables companies to make things faster and cheaper – quickening the economic pace without fueling inflation.

It now appears that Greenspan's productivity Shangri-La – instrumental to the strong economic gains of the 1990s – is on track, even picking up speed as the economy pulls out of the recession.

Yesterday, the Labor Department reported that productivity rose at an 8.6 percent annualized rate for the first quarter of 2002 – its fastest pace in 19 years.

This means the business sector produced a lot of goods and services and used fewer man-hours of labor to produce it.

The sharp increase in productivity means that the Federal Reserve, which met yesterday to discuss interest rates, does not need to worry immediately about inflation.

It also means that US corporations may begin to show the level of earnings that justify higher stock prices.

"This is an exciting number for the stock market and the economy," says Paul Kasriel, chief economist at Northern Trust Co. in Chicago.

Gain predictable – in part

Economists had expected a good first-quarter gain for productivity, especially as orders for goods rebounded.

"You don't fire everyone, you still have labor around and as soon as orders come in they shift their time and efforts to filling orders," says Mr. Kasriel.

However, the productivity gain was greater than expected. One of the reasons appears to be an increase in orders for durable goods, such as computers and other high-tech equipment.

According to the government's report on the first quarter's gross domestic product (GDP), technology spending rose at a 7.5 percent annual rate, while spending on industrial equipment rose at a 15.6 percent rate.

Computer companies have been among the leaders in automation and other ways that companies are employing to produce their goods faster and cheaper.

"Companies have been forced to increase productivity with the strong US dollar and tough competition," says David Wyss, chief economist at Standard & Poor's in New York.

However, there may still be gains in the future as users of the machines try to figure out ways to produce their goods and services more efficiently.

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