Wednesday, 15 of August of 2018

Economics. Explained.  

Nonfarm Productivity

May 3, 2018

Nonfarm productivity rose 0.7% in the first quarter after having climbed by 0.3% in the fourth quarter and having risen 2.6% in the third quarter.   During the course of the past year productivity has risen 1.3%.  The 0.7% increase in the fourth quarter consists of a 2.7% increase in output combined with a 2.1% increase in hours worked.

Clearly, productivity growth has 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 risen 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 in every quarter last year.  For the year as a whole it climbed by 6.3% and is projected to increase 7.2% in 2018.  This turnaround in corporate willingness to invest clearly is a result of the reduced corporate tax rate, the ability to repatriate earnings at a favorable tax rate, significant reduction in the regulatory burden, 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% by the end of the decade  That, in turn, will boost the economic speed limit from 1.8% today to 2.8% within a couple of years.  The standard of living will grow 1.0% more quickly.  It will also help keep inflation in check by offsetting some of the increase in wages.  These policy changes represent the most significant economic events that  have occurred in years!

Stephen Slifer


Charleston, SC

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