Cognizant of the impact of his words, Federal Reserve Chairman Alan Greenspan is rarely, if ever, prone to hyperbolize. So it’s worth taking note when he reaches into his personal lexicon and grabs the phrase “just awesome” to describe a recent economic trend.
Appearing last week before Congress’ JointEconomicCommittee,Mr. Greenspan commented about “the extraordinary advances in productivity in manufacturing.” But even that superlative description didn’t seem to suffice. “It is just awesome,” he said, “what these people have been able to do.”
Delving into the data easily demonstrates that the chairman was not exaggerating. The manufacturing sectors in general — and the consumer durable goods industries in particular — have in fact performed awesomely on the productivity front over the past decade, especially during the past five years.
Consumers have been the unmistakable beneficiaries. And they have voted with their dollars, shifting a sizable portion of their income toward the purchase of increasingly affordable, long-lasting consumer goods. This successful effort of consumers to raise their standard of living has had the collateral benefit of maintaining a growing economy in the wake of a business-investment collapse and a terrorist assault that, together, could easily have turned the relatively mild 2001 recession into something far worse.
During the past five years, productivity in the nonfarm business sector increased by 19 percent. Over the same period, manufacturing productivity soared by 26 percent. In the durable-goods manufacturing sector, productivity skyrocketed by more than 33 percent since the end of 1998.
During the past decade, the share of gross domestic product (GDP) commanded by personal consumption expenditures has increased by 3 percentage points, rising to 71 percent. (Each percentage point currently represents more than $110 billion.) Increased spending on consumer durable goods, which are products that will last at least three years (e.g., furniture, autos, appliances, etc.), has accounted for this entire relative shift, and then some. The share of GDP devoted to spending on consumer durable goods has increased by nearly 3.5 percentage points over the past decade, rising to nearly 10 percent of GDP today. (That represents an increase of more than 50 percent.)
Inflation-adjusted spending (measured in 2000 dollars) on durable consumer goods has more than doubled in 10 years, increasing to more $1 trillion last year. Meanwhile, spending on nondurable consumer goods increased at one-third the rate for durables. And spending on housing, including imputed rents for owner-occupied homes, has grown by less than 30 percent over the same 10-year period.
The primary reason so much spending has shifted to consumer durable goods relates to the fact that prices for these products have been plunging. A chain-type price index covering all of GDP reveals that overall prices have increased by 20 percent during the past 10 years. The prices of services (housing, medical care, etc.) have increased by 31 percent, while the prices of nondurable consumer goods (clothes, food, gasoline, etc.) have risen by 17 percent. Over the same 10-year period, however, prices of consumer durables have plunged by 15 percent. And they have fallen eight years in a row. Since 1998 alone, prices for consumer durables fell 2.4 percent (1999), 1.6 percent (2000), 1.9 percent (2001), 2.9 percent (2002) and 3.7 percent (2003).
Mr. Greenspan has long argued that rising productivity and open markets are indispensable to raising living standards over the long term. America’s recent experience provides ample evidence that this argument is true.