The drop in worker productivity today means an increase tomorrow

Productivity is unusually low.

But this isn’t a big problem, at least to Deutsche Bank’s Joe LaVorgna.

In a note Monday, LaVorgna wrote that productivity usually declines when GDP growth is slower than jobs growth, which was the case in the first quarter.

And the Bureau of Economic Analysis will likely revise first quarter GDP to show the economy actually contracted to start the year.

But the recent drop, for LaVorgna, likely indicates future gains in both economic growth and productivity, not an economy headed towards a recession.

Here’s LaVorgna putting the recent decline in perspective:

“For example, if Q1 real GDP is revised down to -0.8%, it brings the two-quarter growth rate from Q4 2014 to Q1 2015 to just 0.7%, which compares to a hearty 2.3% annualized change in employment over these two quarters. This implies that productivity growth was down -1.6% over this time, which is remarkable during a period of economic expansion. This is shown in the chart below, with the latest observation circled. To place the implied -1.6% drop in productivity into perspective, there have been only two periods in the last 33 years in which productivity fell more, and they were during recessions.

And here’s LaVorgna on why the productivity drop is likely to be resolved through faster growth and productivity:

We believe that the weakness in productivity is significantly overstated and that it will eventually be revised higher to better match output and employment. After all, it does not make sense that firms would hire workers that are so unproductive. The fact that jobless claims continue to make new lows, which points to a step-up in hiring, means that the productivity puzzle is unlikely to be resolved through a slower pace of job growth. Over time, we expect to learn that real GDP, and hence productivity, was actually stronger than has been reported up to this point.”

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