Productivity Sucks

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It's hard to pay much attention to one quarter's productivity, just as it is hard to get excited about one month's jobs number. But when productivity is consistently weak over several years, then we can be sure there is a big problem. Productivity in the second quarter was a miserable -0.5% annualized, right in line with -0.4% over the past year, and worse than the 0.4% annualized over the past two years and 0.5% over the past five years. We haven't seen such poor productivity numbers since the late 1970s, when high inflation, a weak dollar and foreign policy disasters created a multi-year malaise. We have a big productivity problem and it stems from a lack of business investment, pervasive risk aversion, crushing regulatory burdens and a general anti-business, anti-growth sentiment emanating from the White House.

The chart above shows the 2-yr annualized change in the productivity of U.S. non-farm workers. This is a pretty reliable measure of the current climate, much more reliable than the quarterly productivity numbers which are notoriously volatile.

The chart above goes one step further, measuring productivity over 5-yr periods. This highlights fundamental, long-term changes in productivity. The chart also shows how productivity has behaved during different presidential administrations. The Obama years have been miserable, which is another way of saying that the current business cycle expansion has been the weakest in post-war history.

The US economy desperately needs a return to pro-growth policies. If we were to excise trade-related issues from Trump's economic policy speech yesterday, it would be an excellent remedy to what has been ailing the U.S. economy for years. Certainly far better than Hillary's proposals, which amount to doubling-down on all the mistakes of the Obama years (e.g., higher taxes, more income redistribution, more regulations).

The bad news, then, is that we have been suffering from anti-growth policies for a long time and it's been getting worse on the margin. The good news, however, is that this means there is a deep reservoir of untapped potential in the US economy. If the political winds in the next several months start blowing in a more pro-growth direction, the stock market would be fully justified in extending the bull market which began over seven years ago.

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