Monday, 11 of December of 2017

Economics. Explained.  

Nonfarm Productivity

December 6, 2017

Upon revision nonfarm productivity rose 2.9% in the third quarter after having climbed by 1.5% in the second quarter.   That is the  biggest single quarter advance in three years.  Something seems to be happening.  During the course of the past year productivity has risen 1.5%.  The 2.9% increase in the third quarter consists of a 4.1% increase in output and a 1.1% increase in hours worked.

Clearly, productivity growth slowed in the past 15 years. From 2000- 2007 (when the recession began) nonfarm productivity averaged 2.7%.  In the past three years it has slipped to 0.7%.

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%.  In the last three years it has fallen 0.3%.

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 have been reluctant to invest despite a record stockpile of cash, near record low interest rates, and a booming stock market because they have been bothered by uncertainty about future tax rates, 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.  But productivity growth is largely determined by the  pace of investment spending.  After several years in which nonresidential investment was essentially unchanged, it had a dramatic  surge to a 7.2% pace in the first quarter of this year, followed by an additional 6.7% increase in the second quarter, and 3.9% in the third.  This turnaround in corporate willingness to invest clearly reflects the prospect of imminent cuts in the corporate tax rate, the ability to repatriate earnings at a favorable tax rate, and general confidence about economic conditions both in the U.S. and abroad.

These major changes in policy should unleash a continuous wave of corporate investment spending, and because the pace of investment spending largely determines the rate of growth in productivity,productivity growth will climb from 1.0% or so today to 2.0%.  That, in turn, will boost the economic speed limit from 1.8% today to 2.8% within a couple of years.  If these changes actually happen they would represent the most significant economic events that  have occurred in years!

Stephen Slifer


Charleston, SC

Leave a comment