Tuesday, 16 of July of 2019

Economics. Explained.  

Nonfarm Productivity

June 6, 2019

Non-farm productivity jumped 3.4% in the first quarter after having risen 1.3% in the fourth quarter.   During the course of the past year productivity has risen 2.4%.  The 3.4% increase in the first quarter consists of a 3.9% increase in output combined with a 0.5% increase in hours worked.

From 2000- 2010 nonfarm productivity averaged 2.7%.   From 2010 to mid-2016 productivity growth slowed to about 1.0%.  But since mid-2016 productivity growth has accelerated dramatically.  In the  past three years it has risen 1.5%.  In the  past year it has risen 2.4%.

Part of the earlier problem (which continues today)  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, was that for several years businesses were reluctant to invest despite a record stockpile of cash, near record low interest rates, and a booming stock market because they were 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 had 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 since the end of 2016.  For 2017 it climbed by 6.3%, 7.0% last year,  and is projected to increase 5.1% in 2019.  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 , we expect productivity growth to climb from 1.0% or so previously to 2.0% by the end of the decade  It is already there.  As noted earlier, the 3-year growth rate has picked up to 1.5%, and in the past year it has quickened to 2.4%.  If it sustains a 2.0% pace, the economic speed limit will climb from 1.8% a couple of years ago 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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