Given the GDP has been so close to expectation, the slightly slower-than-expected job growth is just the flip side of the somewhat greater-than-anticipated productivity growth.

As you know productivity in manufacturing has really been very impressive. The downside, obviously, is it's made - created fewer job opportunities. And we can reasonably assume that the economy is going forward at a fairly good clip and that, therefore, the demand for manufactured goods will continue reasonably significant. But it depends on productivity growth, or I should say the extent to which manufacturing jobs changes one way or the other depends on whether productivity growth goes up or slows down.

A reasonable estimate for trend productivity growth going forward is about 2-1/2 percent per year...And although it would represent a slowing of the outsized, and unsustainable, gains we’ve seen since [the 1995 to 2001 period], it appears fast enough to maintain the favorable inflation results we’ve had in recent years.

If productivity accelerates or decelerates, we could see inflation start to fall or rise relative to the 1-1/2 to 2 percent rate that prevails today.

The predominant medium-term effect of a slowdown in productivity growth would likely be higher inflation.

Trend productivity growth seems likely to settle down to something around 2½ percent—a respectable estimate of its sustainable rate. In that scenario, real GDP growth of 4 to 4½ percent for 2005 seems pretty reasonable. ... Given all the unpredictable things that can happen, a point forecast of 4 percent growth over the four quarters of 2005 should really be expressed as a growth rate of 4 plus or minus 1¼ percent.

Looking ahead, productivity growth is likely to remain relatively strong as technology continues to become cheaper and more powerful — but it is not likely to be as strong as it has been over the past few years. That is why I expect demand growth to generate steadier employment gains going forward.  

We have what has been called a “jobless recovery” — net employment growth has been relatively subdued coming out of this business cycle trough. Arithmetically this can only happen with an increase in productivity, so in this sense the jobless recovery reflects strong productivity growth.

It is a world of intense competition, and that creates incentives to raise productivity as well as the means to do so. In the past decade, the U.S. economy’s average annual increase in output per hour has been 2.7 percent, just about equal to the extraordinary quarter-century boom that followed World War II. My business contacts talk and act as if the globalization now under way will bring another decade of hypercompetition. This global hothouse will enable, perhaps even force, businesses to keep productivity growth in the range we have enjoyed since the mid-1990s, hopefully for many years to come. If productivity growth can stay near 3 percent, monetary policy can accommodate relatively faster growth without igniting inflation.

The sluggish pace of job gains prior to this year has been a reflection of the truly astonishing extent to which firms have been able to expand real output without needing to add workers. This phenomenon appears to be drawing to a close.

The outlook for productivity is pivotal to next year’s economic prospects, and it is especially hard to project at the present time.

The importance of productivity growth for the economic outlook stems from its role as a link between aggregate demand and labor market conditions, and the consequent pressures on real interest rates. Slower productivity growth, for any given rate of demand growth, means more rapid employment growth and less downward pressure on wages, and could therefore necessitate a steeper-than-otherwise path for real interest rates.

My discussion of the outlook for 2005 has placed productivity trends rather than inflation at center stage, because it strikes me that greater uncertainty surrounds productivity over the coming year.

Recent data suggest that a slowdown in productivity growth may already be in train.

It is true that markups are now elevated by historical standards, and thus are likely to trend down in the near term. But should the emerging step-down in productivity growth persist and markups not decline rapidly, real interest rates may need to rise more rapidly than is now anticipated.