THEORY VS REAL WORLD
The wait for an AI productivity boom to have any meaningful impact on inflation may be equally long. Economists agree on AI's disinflationary potential as workers increase output and businesses limit labor costs. However, the revolutionary technology's initial impact on prices is more likely to be upward. Estimates of AI-related spending over the next few years — on data centers, chips, software, construction, and power — run into the trillions of dollars.
That's inflationary.
Headline labor productivity, which measures hourly output per worker, has been pretty strong in recent years. It accelerated in the second quarter to a 1.4% annualized pace from an upwardly revised 0.8% in the first. On a year-on-year basis, it has been running just above 2% since 2019. That's solid.
But other, broader measures of productivity are mixed. The San Francisco Fed's Total Factor Productivity index has shown more modest gains in recent years, and on a rolling four-quarter basis, the "utilization-adjusted" TFP index has turned negative.
As San Francisco Fed economists noted in May, "broader efficiency gains (from AI) remain unrealized so far."
John Silvia, CEO and founder of consultancy Dynamic Economic Strategy, puts it more bluntly. Conceptually, productivity growth, with everything else constant, should lower labor costs and therefore inflation. But there's simply no link between annual U.S. productivity growth and PCE inflation rates.
"When it comes to the real world, and I'm dealing with the actual data from 1982 to now, I cannot get a statistically significant relationship between the two," he says.
Banking on productivity or a smaller balance sheet to deliver on the inflation side of the Fed's mandate is a long shot. Warsh won't have that long.
(The opinions expressed here are those of the author, a columnist for Reuters)
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U.S. total factor productivity lags labor productivity - San Francisco Fed https://fingfx.thomsonreuters.com/gfx/mkt/lgpdebrxyvo/Productivity2.png
(By Jamie McGeever, Editing by Marguerita Choy)
((jamie.mcgeever@thomsonreuters.com; Reuters Messaging: jamie.mcgeever.reuters.com@reuters.net/))
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