March 8, 2017
Nonfarm productivity rose 1.3% in the fourth quarter after having jumped 3.3% in the third quarter but that follows declines in the three previous quarters. During the course of the past year productivity has risen 1.0%. The 1.3% increase in the fourth quarter consists of a 2.4% increase in output and a 1.0% increase in hours worked.
Clearly, productivity growth has slowed. For example, from 2000- 2007 (when the recession began) nonfarm productivity averaged 2.7%. From 2008 to date it has slowed to 1.4%. And recent growth has been even slower at 0.5%.
Some suggest that productivity is not properly capturing productivity gains in the service sector, particularly with respect to the internet. For example, apps allow people to book airfares, hotels, and cars from their living room and get directions all at the same time. But such gains do not appear to be captured anywhere in the productivity data. The problem with that assertion is that manufacturing productivity — which can be more accurately measured — has experienced a similar slowdown. From 2000- 2007 (when the recession began) manufacturing productivity averaged 5.0%. From 2008 to date it has slowed to 1.4% and in the last three years has risen only 0.5%.
Another part of the problem could be that retiring baby boomers could be leaving both their jobs and the labor force, and taking some of their knowledge with them which is adversely impacting the growth rate for productivity.
The basic problem however, in our view, is that businesses remain reluctant to invest despite a record stockpile of cash, record low interest rates, and a booming stock market. Investment is the primary driving force behind rapid gains in productivity. Unfortunately, business leaders appear to be bothered by uncertainty about future tax rates (will the corporate tax rate get cut and, if so, what deductions might be disallowed), the inability to repatriate overseas earnings to the United States, the rising cost of health care which firms with more than 50 employees have to provide, and an avalanche of onerous, confusing, and sometimes conflicting regulations.
President Trump appears likely to bring about change to all of these concerns. Trump intends to lower the corporate tax rate from 35% to 15%. He will allow firms to bring overseas earnings back to the U.S. at a favorable 10% tax rate. He will revamp health care to consist of tax-advantaged health care savings accounts combined with a high deductible health insurance policy (which will almost certainly cost less then Obamacare). And he intends to completely revamp the regulatory environment with the elimination of all unnecessary, overlapping, and confusing regulations. These major changes in policy should unleash a wave of corporate investment spending, and because the pace of investment spending largely determines the rate of growth in productivity, the economic speed limit should climb gradually from 1.8% today to 2.8% within a couple of years. If these regulatory changes actually happen they would represent the most significant economic events that have occurred in years!