The effects on the economy’s ability to produce goods and services are clear, but theory predicts that a new higher level of productivity growth would also affect the demand for goods and services. The most immediate effects would be on capital investment, as we have seen. A more rapid pace of technological change raises the real rate of return on new investments--perhaps significantly.
Among leading indicators of business fixed investment, machinery orders have increased steadily. Construction floor area has also continued to recover moderately. With respect to housing investment, housing starts in terms of the seasonally-adjusted annual rate reached a significantly high level in the fourth quarter 1996, partly reflecting the stepped-up demand ahead of the rise in the consumption tax rate.