As companies attempt to cope with an economic downturn and the United States fights a war on terrorism, many wonder whether the long-term health of the US economy will be undermined. The answer depends on what happens to the productivity growth rate—the main determinant of how fast the economy can grow. At issue is whether the near doubling of US productivity growth rates during the late 1990s, from 1.4 percent (1972–95) to 2.5 percent (1995–2000), can continue.
Our yearlong research1 indicates that many of the product, service, and process innovations underlying the productivity acceleration of the late 1990s will continue to generate productivity growth rates above the 1972–95 trend for the next several years, although probably not as high as those of 1995 to 1999. Higher productivity, in turn, will boost economic growth.
Surprisingly, the primary source of the productivity gains of 1995 to 1999 was not increased demand resulting from the stock market bubble, as some economists have claimed. Nor was information technology the source, though companies accelerated the pace of their IT investments during those years.2 Rather, managerial and technological innovations in only six highly competitive industries—wholesale trade, retail trade, securities, semiconductors, computer manufacturing, and...