Productivity growth in America is dead.
Or so we’ve been told.
Over the last 13 years, US labour productivity has grown about 1.4% per year, well below the 2.2% long-run trend for the economy since World War II.
And with his book on the topic published earlier this year — “The Rise and Fall of American Growth” — economist Robert Gordon outlined what has become the definitive case for why this low productivity trend is likely to persist.
Gordon’s argument is basically that during the early and middle parts of the 20th century a bunch of things happened — microwave ovens invented, running water standardised, etc. — that only happen once. Hence, economic benefits from these innovations won’t be repeated.
Think of this as something like the “super secular stagnation” worldview.
And low productivity means less economic output per worker and a slower increase in living standards. It is bad.
But in a note to clients published on Tuesday, Deutsche Bank strategist Binky Chadha argues that for all the hand-wringing about the economy being fated to a future of less growth and prosperity, it turns out that economic conditions like we have now are a boon to improvements in worker productivity.
Since World War II, the US has seen two periods of huge productivity gains, and ahead of the second of those boom periods, spanning the years between 1995 and 2003, economic conditions looked a lot like they do today: the labour market was tightening and the US dollar was strong.
From the middle of 1995 through the end of 2003, worker productivity grew 3.2% a year, the strongest period for worker productivity gains since the 1960s.
And as Chadha and his team outline, it is, quite simply, the economy, stupid.
As the labour market tightens, the number of workers for each available job shrinks, meaning employers must squeeze more production out of their current workforce.
Data from Chadha’s colleague Torsten Sløk at Deutsche Bank shows that as of the August jobs report there were 1.3 available unemployed workers per job opening in the US. In 2009, there were 6.
Additionally, declining profits require employers to seek more output from existing workers. Chadha notes that productivity jumped 7.5% during the financial crisis. Corporate profits have been under pressure over the last two years or so.
A strong US dollar also, “reduces the competitiveness of US firms, creating incentives for improving productivity in response,” Chadha writes.
And the pressure corporate profits have faced in the last couple years have, in large part, been attributed to the strong dollar and tumbling commodity prices.
In corporate America, broad economic forces like a strong labour market and a strong US dollar weigh on the ability for US corporates to maintain the record-high profitability they enjoyed after the financial crisis. In economics circles, we have officials like Minneapolis Federal Reserve president Neel Kashkari piggybacking off Gordon’s work, arguing that, “I doubt Twitter and Facebook are net productivity enhancers.”
But rather than being permanent “new normals,” it seems we’re closer to the beginning of a new productivity growth cycle than the beginning of some paradigm-bending new reality for the US economy.
Like Chadha, Neil Dutta at Renaissance Macro argued back in August that productivity gains often follow from tight labour markets and employers who realise their is no other way to grow but to get more from what you’ve already got.
Invest in equipment. Give your best performers raises. See productivity increase.
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