Weirdly, It's Excellent That American Companies Are Firing People - Productivity Is Rising

by: Tim Worstall
Summary

We've the job firings and the productivity statistics out - put the two together to get the proper story.

Companies are firing people, labor productivity is rising, unit labor costs are falling - the second and third are good things.

We should, over time, see a rise in the profit margins of U.S. corporations as a result.

Why Would It Be A Good Idea If Companies Are Firing People?

If people are being fired because all the employers are going bust, then that's not a good idea, obviously. However, if people are being fired because labour productivity is rising - fewer people are required to make the same stuff - then that's absolutely great. Both for the economy as a whole and also for the corporations themselves. Even if slightly less so for the people being fired until they get another job. Worth noting that in the current febrile employment market, that's not going to take long.

The net effect will be to both expand the economy in general and also to increase both wages and profits. As investors we should like all three of those things.

Productivity Isn't Everything

Sure it isn't, but as Paul Krugman has repeatedly noted, in the long run, it's pretty much everything. The basic determinant of the size of the economy, living standards, even corporate profit margins, is the productivity of labour. If this rises, then we all get better off. For human labour is a scarce resource, we don't have unlimited amounts of it. If more is produced per hour of labour, then there's simply more to be consumed, isn't there?

The effect on corporate profit margins is a little more subtle. Rising productivity does mean rising wages - a concept so simple that even Karl Marx got that one right. But there's a time lag in here. Productivity rises, unit labour costs fall, wages rise later. Meaning that corporate profit margins widen while we wait for wages to catch up. By which time of course we should have had another rise in productivity and so on.

The Numbers Themselves

The Bureau of Labor Statistics issues these:

Nonfarm business sector labor productivity increased 3.4 percent in the first quarter of 2019, the U.S. Bureau of Labor Statistics reported today, as output increased 3.9 percent and hours worked increased 0.5 percent. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the first quarter of 2018 to the first quarter of 2019, productivity increased 2.4 percent, reflecting a 3.9- percent increase in output and a 1.5-percent increase in hours worked. (See table A1.) The four-quarter increase in productivity is the largest since a 2.7-percent gain in the third quarter of 2010.

This is the bit of the economy we really want to see motoring. As Krugman says, productivity is the long-term most important driver of everything economic. And we're up at rates similar to the climb out of the recession - when productivity always rises quickly, that exit.

We can also expand the figures:

US productivity (US productivity numbers chart by Moody's Analytics)

Note that unit labour costs are falling - this is the thing which is good for corporations, the things we invest in.

What's Happening To That Labor?

We've another report out too, the Challenger one on firings.

U.S.-based employers announced plans to cut 58,577 jobs from their payrolls in May, up 46% from the 40,023 cuts announced in April, according to a report released Thursday from global outplacement and business and executive coaching firm Challenger, Gray & Christmas, Inc.

May’s cuts are up 86% from the same month last year, when 31,517 cuts were announced. So far this year, employers have announced 289,010 job cuts, 39% higher than the 207,977 cuts announced in the same period last year.

This is where the increased labour productivity is going, at least in part. Sure, we can feel sorry for those losing their jobs. But this reallocation of labour to other and different outputs is part and parcel of how an economy grows. And given current unemployment rates, few are going to be out of work that long.

Again Moody's gives us a chart:

Challenger jobs report (Job firings from Moody's Analytics)

The Economics Of This

We might note that economic change isn't always pleasant for those being changed. But this is how economic growth does indeed happen. We find more efficient ways of doing something, release the labour we no longer need. That then gets employed doing something else, somewhere else, and so the economy grows. It's not particularly that rising productivity increases the amount of what we already make. Rather, that it frees up labour to go off and do other new things.

Rising labour productivity should, ceteris paribus, mean an increase in GDP, an increase in corporate profit margins and, in time, an increase in wages. All of which we think are a good idea.

The Investor Takeaway

As with so many other statistics at this time, we're seeing that the domestic economy seems to be doing just fine. We all have our worries about the effects, whatever they're going to be, of the ongoing trade war(s). The country is getting richer by using less labour to do any one thing, meaning there's more labour to do other things - more things being done is the very definition of economic growth.

Further, the manner of it happening, unit labour costs falling, is, on its own, going to increase corporate profit margins, the very things we're chasing by buying equities. Sure, there are other things going on too, reality being the balance of all of them. But this particular part of the information mosaic is good news for us.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.