One of the most troubling aspects of the current economic recovery has been the lagging labour market recovery.
Since the recession, corporations have been operating on extremely lean cost structures and low employee had counts. These productivity gains manifested in the form of surging corporate profits on modest revenue gains.
However, the latest economic data suggests productivity gains may have topped out. Deutsche Bank economists Carl Riccadonna and Joseph LaVorgna write that this is good news for hiring.
From their note (emphasis ours)
…The decline in productivity (-2.0% in the quarter) is the largest drop since the economy was in sharp contraction in late 2008. Productivity has risen just +0.6% over the past four quarters—well below its long-term average of approximately 2.1%. While slowing productivity over a broad time horizon is a troubling prospect for the economy, in the short term it is positive news for the labour market. In a low productivity environment, economic growth coincides with a faster pace of job creation. We see little reason to believe that at this point the productivity slowdown is anything more than a typical cyclical development…
…The second chart shows how a broad productivity growth deceleration has coincided with faster hiring in the current economic cycle. A pace of hiring in excess of “steady state” (which is approximately 100k to 125k per month) will lead to intensifying pressures in the labour market and should result in a more pronounced downtrend in the unemployment rate. However, faster hiring may not be apparent in the February labour, due to distortions from the recent Northeast snowstorm…
Here’s the chart:
Photo: Deutsche Bank