Used properly, the term 'new e-conomy' is warranted. Since 1995, there has been a wave of innovation associated with both the production and use of information technology that has been translated into improved US economic performance. In particular, there has been a substantial acceleration in trend total factor productivity growth. Most of this acceleration actually took place outside of the computer sector. Almost none of the acceleration was cyclical. There is now clear supportive evidence of an acceleration of productivity in service industries that are major purchasers of information technology such as finance and wholesale and retail trade. These gains reflect not only increased investment in information technology but also complementary innovations in business organization and policy. To be sure, as evidenced by recent financial market volatility, there have been speculative excesses, but these should not obscure the fundamental gains that have been made.

A longstanding issue in empirical economics is the behavior of average labor productivity over the business cycle. This paper provides new insights into the cyclicality of aggregate labor productivity by examining the cyclical behavior of productivity at the plant level as well as the role of reallocation across plants over the cycle. We find that plant-level productivity is even more procyclical than aggregate productivity, because short-run reallocation yields a countercyclical contribution to labor productivity. At the plant level, we find that cyclicality of productivity varies systematically with long-run employment growth. Over the course of the cycle, plants that are long-run downsizers exhibit significantly greater procyclicality of productivity than do long-run upsizers. When we control for the direction of a cyclical shock, we find that the fall in productivity from an adverse cyclical shock for long-run downsizers is significantly larger in magnitude than is the fall in productivity from an equivalent adverse cyclical shock for long-run upsizers. We argue that these findings raise questions about one of the most popular explanations of procyclical productivity: changing factor utilization over the cycle.