Today we look at total factor productivity, which is a measure of economic efficiency that captures how effectively an economy uses its inputs to produce outputs. TFP reflects technological progress through innovation and adoption of new technologies, allocation of resources, and other factors that boost the overall economic product beyond just increases in labor and capital.

Improvement in TFP is crucial because it drives long-term economic growth and raises living standards. The FRED graph above shows two interesting observations related to this.

First, over the long run, US TFP has grown significantly: Between 1955 and 2015, it improved by about 55%. This increase represents a substantial improvement in the nation’s ability to generate economic output from its resources.

However, the rate of TFP growth has slowed noticeably in recent decades. Particularly since 2005, TFP has increased by only about 5%. This slowdown is a concern for economists and policymakers because it suggests a potential decline in the pace of innovation or the economy’s ability to adopt new technologies.

Second, the graph also clearly shows that TFP tends to significantly drop during recessions, indicated by the shaded areas. This doesn’t necessarily mean that the economy literally “forgets” how to produce goods and services efficiently. Instead, these dips reflect several economic realities during downturns: For example, capacity utilization often decreases, leading to less-efficient use of existing resources. As the economy recovers, TFP typically rebounds, suggesting that these efficiency losses are generally temporary rather than permanent losses of productive knowledge or capability.

How this graph was created: Search FRED for “total factor productivity” and click on the series for the United States.

Suggested by Aakash Kalyani.