Economists have long suspected that productivity gains as a result of technological innovations such as electronic funds transfer have been understated throughout the vast service sector of the economy, and particularly in a leading part of that sector -- banking.
The Commerce Department recently outlined in general terms a sweeping plan to revise the way in which it calculates productivity in services, including banking, taking into account the dramatic transformation of financial services over the past two decades. The details are expected to be released in October.
The changes are expected to directly affect Federal Reserve monetary policy and indirectly affect the performance of bank stocks. The central bank reviews the productivity figures when deciding on interest rate policy, and higher productivity rates ease fears of inflation and reduce pressure on the Fed to raise interest rates.
Because bank stocks tend to fall in a rising-rate environment and rise when rates fall, the new approach toward counting productivity could lead to higher bank stock prices.
The new assumptions also could go some distance toward confirming that the jump in bank profitability in recent years is here to stay by showing that greater profitability stems from higher productivity and efficiency, rather than merely being the byproduct of a strong economy.
"It changes the perspective on how these gains were achieved," said economist Mickey D. Levy of Bank of America Securities in New York. "Many people have long suspected that banks are now a lot more efficient than the productivity numbers suggest."
As part of the change, government economists who calculate the economy's output and growth rate are expected to begin recognizing computer software as a business investment, not a cost. Banks and other financial services firms, as huge consumers of software, should be among those showing the biggest jumps in productivity as a result of this change.
"It is about time these changes were made, since the trends are only accelerating," said James E. Glassman, chief economist at Chase Securities Inc., a unit of Chase Manhattan Corp. in New York.
"But in fairness," says Bank of America Securities' Mr. Levy, "it isn't easy at all to take these kinds of measurements."
"These changes have huge long-run implications for Fed policy and government budget policy and the economy itself," Mr. Glassman said. Indeed, it means the economy's strong growth of past few years, a source of inflation concerns, may not have been as excessive as it seemed.
It also indicates that overall corporate profitability has been stronger in real terms, suggesting that stock prices are not as far ahead of expected earnings as some observers have feared.
It could mean that some exuberance by investors has been justified.
The changes will be outlined late next month by the Commerce Department's Bureau of Economic Analysis, which measures the economy in various statistical ways. They were recently previewed in the bureau's journal, Survey of Current Business.
Accurate economic data is very important. "Huge decisions affecting billions of dollars in financial assets rest on having good numbers," said economist Nicholas S. Perna of Fleet Financial Group Inc. in Boston.
For years, the implication was that most of the economy's productivity was concentrated in manufacturing, because output was so much more easily measured there than in services, Mr. Perna said.
Service productivity involves trying to quantify the input of elusive factors like the use of fax machines in sales calls rather than the number of units produced in a factory setting.
Over the past 25 years, however, the nation's manufacturing sector has shrunk as the services sector has grown in the "post-industrial" economy.
That led to concerns about low productivity growth.
Banking was at the forefront of concerns as the once-staid industry was forced to reinvent itself through technology and unprecedented consolidation in a fast-paced era of deregulation, globalization, and heightened competition.
But official gauges of productivity have not caught up with the changes. In banking, the government's statisticians have for years "implicitly presumed zero productivity." That is, they assumed that output rose at exactly the same rate as the number of hours worked by bank employees.
In the future, the Commerce Department will try to account for the efficiency of modern banking practices, like automated teller machines.
Meanwhile, computer software will be treated as an investment with a useful life of more than a year, rather than equivalent to the cost of a raw material in a manufacturing process.
Just this change in the realm of business investment would have raised the official estimate of the nation's gross domestic product in 1996 by $115 billion, or 1.5%, according the Commerce Department.
The upcoming revisions seem to explain some of the mystery behind the economy's rapid growth without inflation over the past several years. But Mr. Perna cautioned that they do not change the tightness of the job market or suggest that inflation is no future threat if business conditions overheat.
"Actually, we are only fixing the speedometer," he said. "It doesn't mean the economy can grow faster without the threat of getting a ticket."
