First, a recap of this morning's productivity numbers.
Headlines and summary (from Bloomberg):
*U.S. PRODUCTIVITY INCREASED 3.8% IN 2009, MOST SINCE 2002
*U.S. UNIT LABOR COSTS DECREASED RECORD 1.7% IN 2009
*U.S. THIRD-QTR PRODUCTIVITY RISES 7.8% VS 7.2% PRIOR ESTIMATE
*U.S. 3Q LABOR COSTS FALL 7.6% VS 1.5% DROP PREVIOUS ESTIMATE
*FOURTH-QTR PRODUCTIVITY GAIN EXCEEDS 6.3% MEDIAN FORECAST
*U.S. PRODUCTIVITY ROSE 6.9% IN 4TH QTR, LABOR COSTS FELL 5.9%
A measure of employee output per hour rose at a 6.9 percent annual rate, capping the biggest one-year gain since 2002, revised figures from the Labor Department showed today in Washington. Labor costs dropped at a 5.9 percent pace, more than anticipated, and fell 1.7 percent for all of 2009, the biggest drop since records began six decades ago.
Spice it up with a little numbers (click charts to enlarge):
Throw in a graph:
Now that there is no other way to present it, let me make the following comment: While I have heard some (talking heads mainly, along with some "streeters") opine that the changes in productivity look to be structural in nature, I disagree. Coming out of periods of weakness, productivity increases as companies reduce headcount more than reductions in output (the definition of productivity increases). This is intuitive. The graph above would also serve to confirm this.
With that said, I see a couple things coming down the line as a result of this:
- Margin increases that result from productivity increases should help companies continue to solidify their financials - notably middle and bottom lines of the income statement which should result in better debt metrics as retained earnings increase and debt as a multiple of EBITDA and as a percent of capitalization are reduced.
- At some point output will have to increase (the long awaited growth in top line), at which time we will see broader-based hiring (see table below for historical productivity
So follow hours, as this will lead output.
Bottom line: Productivity is looking better (as one would expect), but we need further confirmation that output will increase (top line growth) which should lead to an increase in hiring, solidifying any recovery.
As an FYI, just to refresh the definition of productivity:
Productivity: These productivity measures describe the relationship between real output and the labor time involved in its production. They show the changes from period to period in the amount of goods and services produced per hour. Although these measures relate output to hours at work of all persons engaged in a sector, they do not measure the specific contribution of labor, capital, or any other factor of production. Rather, they reflect the joint effects of many influences, including changes in technology; capital investment; level of output; utilization of capacity, energy, and materials; the organization of production; managerial skill; and the characteristics and effort of the work force.
Have a great day.
Disclosure: No position