Friday, November 7, 2008

The U.S. economy is efficient and resilient

Yesterday the Bureau of Labor Statistics released its measure of nonfarm productivity. U.S. productivity slowed to a 2.0% annual pace, but relative to the U.K. and Germany, the silver lining shows the innate resilience of the U.S. economy. Once the U.S. economy emerges from the recession, productivity will propel economic growth forward.

Nonfarm productivity measures output per man-hour worked for all U.S. production sectors except farming. Productivity is a very good estimate of how efficient is the U.S. workforce in the utilization of all technologies and resources available to it, including capital, production capacity, materials, energy, management structures, available technologies, and the characteristics of the workforce. The BLS report indicates the following:

  • Nonfarm productivity grew at a 2.0% annual rate.
  • Output grew 0.3%, while hours fell 1.7%.
  • Worker compensation grew 4.3% over the year, but in real terms (with the effects of inflation included), fell -0.9%.
  • Unit labor costs – adjusted for gains in productivity – grew 2.3% (consistent with the surge in compensation).

Here’s is Bloomberg’s take on the productivity reading: "U.S. worker efficiency rose in the third quarter at a slower pace than in the previous three months as the economy slumped, a sign employment may take a bigger hit."

Here is my take on the productivity reading: Businesses are squeezed from slackening demand and are efficiently cutting their labor force. Furthermore, those workers that remain employed are receiving increased compensation under the rising costs of living, but the higher compensation does not fully offset the rise in prices over the year.

In my opinion, this reading illustrates the U.S. economy’s ability to remain productive during a recession. And although the labor force suffers now, it pays off over the long run with stronger productivity and growth going forward. Productivity falls during recessions; current productivity growth, 2.0%, is consistent with the lowest reading in the 2001 recession, but 1.4% above the lowest reading in the 1990-1991 recession (0.6%). Productivity and growth are highly correlated and once productivity picks up, growth will too.

The chart plots annual productivity growth from the first quarter of 1991 to the third quarter of 2008 for the U.S. and similarly developed economies, the U.K. and Germany. Spanning 2000-2008, average productivity growth for the U.S., the U.K., and Germany was 2.5%, 1.8%, and 3.6%, respectively. (See this post for a short description of the German labor force; the labor force has become highly productive partially due to a structural shift in 2006).

The U.S. economy remains resilient, producing just 0.5% below its 8-year average, while the U.K. and Germany are producing 1.7% and 4.8% below their averages. The U.S. is more efficient, and cuts back on its labor force in order to maintain efficiency gains. On the other hand, the U.K. and Germany cling to their labor force, which tends to hurt the aggregate economy in the short term. However, one cannot discount the impacts of a quickly deteriorating labor market on the welfare of the workforce, and so all I can say here is that the U.S. remains more productively resilent, providing a bigger boost when it turns around.

It is likely that U.S. productivity will decelerate for the next two quarters, but with spare capacity building, firms will pick up the slack in the labor force when stronger demand for goods and services emerges. Productivity growth will kick in, and quickly at that.

I agree with Ben Bernanke, in a Wall Street Journal titled We're Laying the Groundwork for Recovery (hat tip, Mark Thoma):

“I am not suggesting the way forward will be easy. But the tools are in place to respond effectively and with force. These tools will bolster the capital of our financial institutions, restore confidence in their debt, and offer increased access to funding for businesses. Their application, together with the underlying power and resilience of the American economy, will help to restore confidence to our financial system and place our economy back on a path to vigorous growth.

Rebecca Wilder

1 comment:

  1. Isn't there a little more emphasis om production by those who feel their job is threatened? I was also wondering what effect is there by the change in goods produced, like the decrease in smoke stack and increase in silicon valley type things? There is also a proliferation in robotics in all sorts of fields.

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