Monday, September 20, 2010

WSJ: As Productivity Slows, Will Serious Private Job Creation Finally Begin?

Aside from the massive global structural changes occurring in the economy, a large jump in productivity in American business has been one of the limiting factors to an atypical bounce in private sector hiring.  Unlike the government sector, which apparently can be run at a loss indefinitely, the private sector actually needs to be run for profit.  With the reduction in labor costs by moving work overseas, combined with technological advances - we've seen 'jobless' recoveries of increasing intensity over the past 2 decades.  This time around there is also a major imbalance on the demand side as the 'pent up' consumer of the previous 3 decades, has become the 'spent out' consumer who no longer has the house ATM working in her favor.

But at some point you can only squeeze so much blood out of stone - even with a desperate workforce willing to do anything to not join the ranks of unemployed.  Over the last few quarters we have seen the huge surge in productivity of 2009 and early 2010 decelerate sharply and indeed reverse... now the question can be raised, will private companies finally be forced to hire?


  • Companies are having a harder time boosting productivity. For now, that is probably a good thing. Productivity, as measured by output per hour, grew at a breakneck pace last year as businesses sought to get as much work out of as few people as possible. This year that growth slowed, and then screeched into reverse. That's a sign that many companies are reaching the limit of how much they can get their workers to do. In other words, they might actually have to start hiring more.
  • Lackluster productivity growth usually isn't something to crow about. Without coming up with ways for workers to produce more and better goods and services, the economy can over time grow no faster than the labor force grows, leaving wages stagnant. But with the unemployment rate (so high), getting more people back to work would do far more for the economy now than improving the productivity of the current work force.
  • It's normal for productivity to surge in the early part of an economic rebound, as business returns quicker than companies add workers, and for those productivity gains to then recede as hiring catches up. But the recent swing has been unusually extreme
  • Last year, productivity grew at an average annual rate of 6.2%, the fastest pace since the 1960s. In the first quarter it slowed and then in the second it actually contracted, falling 1.8%. Such large declines are uncommon, especially in the early stages of an economic recovery.

  •  The latest drop in productivity was something of a fluke, said Barclays Capital economist Dean Maki, coming about because companies upped hiring and workers' hours even as the economy slowed. But he calculated that even if the economy grew as quickly as it had in the first quarter, "we still would have seen a slowdown in productivity in the second quarter."  In the third quarter, the economy appears to be growing at about the same rate as companies are increasing workers' hours. That's a recipe for little, if any, productivity growth.
  • Companies across the economy have been reluctant to invest in new equipment in recent years, and last year didn't even spend enough to replace what was wearing out, economists estimated. Even with a rebound in capital spending this year, companies still haven't brought the capital stock—the inflation-adjusted value of all business equipment and software in place in the U.S.—back to where it was two years ago.
  • The result: Companies have far less leeway to increase production without adding workers now than they did following the 2001 recession. That suggests that the current economic recovery, which most economists believe began in the middle of last year, won't be nearly as jobless as the post-2001 experience was.

We'll check back in 12 months to see how that theory plays out.   Without government spending and Asian exports it just appears the organic domestic demand side of the equation simply does not require a boom in hiring even if productivity stalls.  

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