What jumps out is the period following the initial recovery from the Great Recession (rightmost bar), where the contribution of capital intensity went negative, after being in the ballpark of 1%, give or take, in the entire post-war period.
So while multifactor productivity and labor composition have been making modestly positive contributions in recent years, that of capital intensity has turned negative despite cheap money and the average age of private nonresidential fixed assets being near a half-century high.
Please recall that the ratio of capital to hours worked defines capital intensity. What’s happened is that economic growth, such as it is, has been skewed toward growth in the number of hours worked, largely in lower-wage service sector jobs, while capital investment has taken a huge hit.
Basically, without a revival in capital investment, we are unlikely to see much of a recovery in labor productivity growth.
But notwithstanding this long-term structural problem, the Fed is pretty close to meeting its dual mandate, right?
As we know, the unemployment rate has been falling steadily for years, and is now practically at the Fed’s shrinking estimate of the non-accelerating inflation rate of unemployment (NAIRU).
And inflation, including, in particular, the core PCE deflator, is pretty close to the Fed’s 2% target. And yet the Fed seems pretty “dovish.”
So what’s the problem?
One could argue that it’s what has effectively become the Fed’s third mandate…
