The Organisation for Economic Co-operation and Development jettisoned its scepticism over the new economy yesterday, supporting the view that an economic transformation occurred in the US during the 1990s.
The assessment, which came in the Paris-based organisation's annual review of the US economy issued yesterday, was applauded by the Clinton administration.
In terms of potential growth, the US now stands fourth behind the Republic, Finland both of which have benefited from technological innovation, and Australia.
The OECD, citing a lack of sufficient data, had previously been agnostic about whether advances in information technology had transformed prospects for the US economy.
"The US economy seems to have shifted to a higher potential growth path, having recovered a significant amount of the dynamism lost in the 1970s and 1980s," the report said. "Such a durable increase in output is linked to a significant economic transformation."
The shift had generated a sharp increase in the potential growth rate of the US economy - the pace at which it can grow without serious strains emerging - from a low of just over 2 per cent in 1993 to about 3.6 per cent today. That had meant that the US has moved sharply up from the middle towards the top of the rankings of the 22 economies that the OECD watches closely. The report said labour productivity had, unusually, continued to increase over the economic expansion, which was now the longest since records began in the 1850s. Labour productivity growth had probably doubled from the rate seen in the 20 years to the mid-1990s, helped by a sharp rise in the capital equipment and software available to workers.
Advances in information technology had resulted in a fall in the price of investment goods. If that fall continued, there was a possibility "of maintaining, or even further boosting, the higher overall growth of labour productivity and hence of average real incomes for some time to come".
The report, however, remained uncommitted on whether there had been an underlying improvement in the functioning of the labour market. It said there was little empirical evidence to suggest the non-inflationary rate for unemployment had fallen below 5 per cent. With unemployment currently at a 30-year low of 3.9 per cent, this suggested "an eventual pick-up in inflation".
The report forecast growth of 4 per cent this year, although officials said the forecast was likely to be increased soon, and noted growth in demand had begun to give companies extra pricing power. It forecast that growth would slow, with the help of tighter monetary policy, to below 3 per cent next year.
The full extent of necessary interest rate increases was uncertain but the report projected a 1 percentage point rise in the federal funds rate by the end of the summer and suggested this could be the minimum necessary. The rate is currently at 6 per cent, following five quarter-point increases by the Federal Reserve since last June.
