Productivity Surge Boosts U.S. Growth Outlook for 2010

Guest Post by Oxford Analytica

The US corporate sector has slashed costs over the past year, eliminating over 7 million jobs and trimming the workweek to a record low. However, the painful rise in unemployment (to an official rate of 10.2% in October) has been accompanied by a record surge in productivity and falling unit labour costs, bolstering equity values and padding corporate profits. This trend suggests that the rebound may be more robust than widely expected.

Workforce cuts. During the past 18 months, the US economy has lost one-third more jobs than would have been predicted by econometric models on the basis of the decline in real GDP. The result of such savage workforce cuts was productivity growth of 4.3% during the past year, including a 9.5% annualised third quarter surge — the fastest quarterly rise since the data series began in 1948. Productivity usually rises during recessions, but at a much slower pace. In the mild recession of 2000-01 there was an up-tick in productivity, but the economy continued to shed jobs for two years after the recession formally ended. Although many commentators predict another ‘jobless recovery’, present conditions are very different, and point towards a more positive scenario.

Wage restraint. There has been no growth in wage and salary compensation since the downturn began and unit labour costs fell 5.8% during the second quarter. During the severe downturns of 1974-75 and 1981-82, compensation grew steadily despite plunging output. Inflation was much higher in those periods, so firms found it more difficult to restrain costs. As a result of the current round of successful cost restraint, non-financial corporate profits have fallen only 7% from their peak in the third quarter of 2008 and rallied nearly 8% during the second quarter of this year. If the US economy can achieve 2-3% output growth next year, profits will probably increase by at least 30%.

Sustained productivity growth? The important long-term question for the economy is whether the corporate sector can sustain high productivity growth once the recovery is underway. In the past, productivity typically soared during the first year after a recession:

• Past pattern. In the year after the 1973-74 slump, productivity grew 6.2%; following the 1981-82 downturn, it grew 4.5%. In the year after the 2000-01 recession, it grew by 4.8% as firms continued to trim their labour forces.

• Crucial to growth. Many economists believe that the sustainable growth rate of the US economy is slowing to 2.0-2.5% from over 3.0% five years ago because of declining labour force growth and faltering productivity. However, if the corporate sector can deliver productivity gains of 3.0% or higher after 2009, the economy’s trend growth rate will also remain close to 3.0%.

• Cure for many ills. The productivity question will be critical to the Obama economic policies. Both the White House and the non-partisan Congressional Budget Office assume that output growth will exceed 4% in 2011-12. Such a healthy rebound would produce a resurgence of tax receipts and help to reduce the federal government’s fiscal deficit. High productivity would also lessen inflation risks and reduce the need for the Federal Reserve to tighten monetary policy aggressively.

The resilience of profits during the past year increases the odds that the economy will enjoy a sustained recovery in 2010.

It has already boosted wealth and confidence by encouraging a major equity market rally. However, after severe cost-cutting during the acute phase of the financial crisis, it is now essential that firms cease laying off employees in order to stabilise personal income.

Comments

[eggfaced:]

nytimes.com/2009/1...

This article just published this Wednesday points out a known (admitted by the Gov bureau) flaw in the GDP reporting. To sum the point made in the article: A car sells for 20,00 but is made from all foreign parts made by foreign workers that is only assembled here should not contribute 20,000 to our GDP. There is not adequate data to account for this but it is important when analyzing the data.

Simply put: while there may be some productivity gains as a result of all the job cuts it is not enough to actually inflate GDP and provide sustainable growth.

Nov 13 03:03 PM

[dingding:]

Is the current surge in productivity a result of people working harder for fear of losing their jobs, or are companies discovering permanent ways of doing the same for less?

Nov 13 06:08 PM

[Gary A:]

I have a problem with all this happy talk. My problem is that the US consumer is dead in the water, and the numbers from the government regarding spending levels do not reflect it. While we have local tax receipts tanking, while we have home price depreciation, while we have state governments in massive trouble, spending stays flat according to the voodoo figures reported by the federal government.

Someone is lying. Tax receipts don't lie. The resilience of profits has nothing to do with the truth, that our economy is nothing without stimulus, and without wage increases our economy cannot grow on its own. This author is indeed a follower of the new voodoo economics!

Don't forget folks, that this country has had flat wages and only bubbles to replace those flat wages. Now it looks like there will be flat wages as far as the eye can see because of these productivity gains. That won't be helpful to a recovery.

Nov 13 06:09 PM

[TheSnail:]

Hey Gary.. there are apples... and there are oranges....sorry this is getting too complicated for you.....nevermind.

Nov 13 06:45 PM

[bob adamson:]

If this surge in productivity is largely based on staffing and staff remuneration restraints then it stands to reason that growth after these restraints weaken will be fast but short lived unless there are other factors underpinning that growth.

Nov 13 07:54 PM

[Gary A:]

Hey snail, that is a ridiculus comment. Pump and run. Must be your MO.

There are no recoveries without wage increases or more bubbles. There are two ways to get wage increases. One is to pay people more. The second is to defend the dollar so that gas isn't overpriced by a massive amount.

Even the article says job declines must stop. So obviously they would like to have a productivity and jobless recovery, but they don't really believe it or they wouldn't have said it.


On Nov 13 06:45 PM TheSnail wrote:

> Hey Gary.. there are apples... and there are oranges....sorry this
> is getting too complicated for you.....nevermind.

Nov 13 08:02 PM

[bob adamson:]

dingding -

Productivity in an economy is not really a measure of the work ethic or diligence of the work force. It is essentially a ratio of the value of outputs over inputs.measured across the economy.


On Nov 13 06:08 PM dingding wrote:

> Is the current surge in productivity a result of people working harder
> for fear of losing their jobs, or are companies discovering permanent
> ways of doing the same for less?

Nov 13 08:21 PM

[athena:]

I believe that the internet has profoundly changed everything and those jobs are not coming back, more will disappear and productivity will stay high.

Nov 14 06:14 AM

[Moon Kil Woong:]

Companies don't merely cease layoffs to support wages. So far the company that is downward scalable and do so the fastest has been the biggest benificiary along with the company that has a good chunk of their revenues coming from overseas. This trend only encourages more of the same. More business overseas less employment here.

Until domestic demand grows you are barking up the wrong tree asking companies to stop laying off people. If anything the cost of doing business here in the future is growing simply because the government is eating the entire economy and rather than turning unemployed towards productive businesses they are encouraging them to take rather unproductive and costly government jobs. Businesses are very straightforward. If the environment is uncompetitive and unfriendly they go somewhere else. It's about time the US face reality. The US is not business friendly unless you are big and want to use the taxpayer as a piggy bank or dodge taxes with overseas accounts and special interest tax breaks.

Nov 14 06:57 AM

[metalpipe:]

Soon there will be too few people able or interested in buying the products on the shelves. This surge in productivity will only increase inventories that, by next March, will become stagnant until 2011. Mark my words. This no jobs recovery is a fools game.

Nov 14 09:32 AM

[Michael2343:]

why are labor costs falling one might wonder. Because the private sector is getting wrecked by big government and big banks. Supply and demand for work is driving costs down, even though people are paid not to work.

The big picture is that its basically a takeover of free enterprise. In order to stay alive businesses are making cutbacks, going more lean, but now they are basically having to cut off their arms and legs. Its gotten worse over 2009.

Also I would challenge anyone to assemble an accurate "productivity" measure that was not majorly subject to interpretation.

Nov 14 10:17 AM

[The Geoffster:]

"The truth is, in order to get things like universal health care and a revamped education system, then someone is going to have to give up a piece of their pie so that someone else can have more."
Michelle Obama
This idiotic statement sums up the problem with socialists. They think the size of the pie is fixed. They have no clue how to grow the economy because they think the market system is unfair.

Nov 14 01:09 PM

[Gary A:]

The Republicans played the same game. Paulson took the taxpayer pie and gave it to the banks. Bush was a corporate socialist, ie fascist. Bush made war so that oil companies could increase their reserves in Iraq. It came out of the taxpayer pie. It is always from the taxpayer if big fascist business wants a bailout of some sort. It mainly accrues to banks and oil companies and military companies.

Until these are brought under control we will have a weaker and weaker consumer who will have to pay more tax.


On Nov 14 01:09 PM The Geoffster wrote:

> "The truth is, in order to get things like universal health care
> and a revamped education system, then someone is going to have to
> give up a piece of their pie so that someone else can have more."
>
> Michelle Obama
> This idiotic statement sums up the problem with socialists. They
> think the size of the pie is fixed. They have no clue how to grow
> the economy because they think the market system is unfair.

Nov 14 01:36 PM

[Robespierre2:]

I say outlaw the corporation as a business model! I"m not kidding.

The corporate model preys on everything and everyone. The American consumer can only recover if they are paid a decent wage - and a decent wage is anathema to the corporate model.

Corporations assemble overseas, ship here, and don't even pay taxes.

OFF WITH THEIR HEADS!!

Main ST -- not Wall St ..... will bring back the American idea.

Nov 18 10:17 AM