Tuesday, August 11, 2009
Usually productivity growth tumbles during a recession. Firms incorporate economic conditions at a lag, cut marginal costs (i.e., jobs), and the unemployment rises. Not this time.
The chart illustrates annual productivity growth per quarter since 1950. As you can see, productivity growth dropped below zero in six of the last ten recession (including this one). Even more remarkable is: that this cycle ranks number two - behind the 2001 recession (2.0%), which didn't even see negative annual GDP growth after recent revisions - as the recession with the highest trough in annual productivity growth, 1.9% in Q2 2009.
Why is this important? Well, it means that firms have fired at a rate inconsistent with previous cycles - much faster, in fact. Brad DeLong suggests that firms are not "hoarding labor" and predicts a jobless recovery due to the fact that the historical relationship between output and job loss is diverging from that seen in previous recessions. It seems to me, though, that firms fired at record rates; and therefore, they may hire at lightening speed as well. Robert Waldmann at Angry Bear suggests the same.
According to the Wall Street Journal, the drop in service sector employment implies a speedy labor recovery. Here is an excerpt from yesterday's article:
The rapid pace at which businesses shed jobs during the recession comes with a flip side: Workers will need to be hired back quickly as the economy improves.These productivity numbers suggest that there is a significant probability that a resumption in demand for end-production will drive a sharp recovery in the labor market.
So deep have companies cut jobs that Friday's employment report, which showed that the U.S. economy lost a quarter-million jobs in July, was seen as a relief. Since the recession began in December 2007, U.S. payrolls have fallen by 6.7 million, according to the Labor Department. That's a 4.8% decline, a level not seen since the late 1940s.
"Firms were unusually aggressive in cutting costs and cutting employment," said James O'Sullivan, an economist with UBS. "The flip side of that remains to be seen, but it could mean that companies will be quicker to bring back people because they were more aggressive about getting rid of them."