Productivity Jumps – Is That Good?

This week seems a bit like summer generally: very sleepy. The only data being released is second order stuff like today’s productivity report. On the surface the numbers look good, with business productivity jumping at an annual rate of 6.3% in the second quarter. this is the largest growth rate since 2003, and under normal circumstances would be greeted with great acclaim.

Productivity is the driver of wealth growth. The general notion is that the more we produce per hour, the higher hourly wages can rise. So as long as productivity climbs personal incomes will also drift upwards.

Unfortunately, however, the productivity statistic can tell a misleading story. The second quarter is such a time.

The problem is that the numbers are calculated by combining output in total and the number of hours it took to produce that output. Today’s release has a very positive productivity gain that results from two negatives: output declined by 1.8%, but since the number of hours declined faster, by 7.5%, the overall picture looks good.

Suddenly what, on the surface, looks like something to cheer about, is actually something to be concerned over. That sharp drop in hours worked has to be viewed as highly negative: it complements the employment data I discussed yesterday, and reinforces the impression that the melt down in business has become extremely severe. The private sector has imploded.

Worse still, today’s report also includes wage data. Nominal wages, that is wages unadjusted for inflation, rose very slightly by 0.1%, but that growth was swamped by inflation, which, although quite low, was sufficient to force real wages down 1.2%. Declining hourly wages are not unusual in a recession, but this time the decline has begun to persist longer than normal. If maintained such a decline would obviously undermine any chance we have of getting a sustainable recovery.

So while today’s headline looks terrific – a nice jump in productivity – all the underlying data is a bit depressing.

It is reports like this that keep adding to the view that the recovery, whenever it arrives, will be very weak. The economy has contracted very sharply. Most often such a contraction would be followed be an equally rapid reflation. This time it is very hard to make the case for rapid recovery. The hit to wages and employment have been massive. Moreover, the overhang of debt and the collapse of home prices adds an unusual burden to households: the impulse to pay down debt is very strong, and already families have succeeded in eliminating much of the frothy debt accumulated in the last decade. Even with this, debt loads remain high by historical standards and the carrying cost of that debt is rising as the big banks try to squeeze profits out of consumers. With wages sluggish and even declining in inflation adjusted terms, and with debt pay down taking a priority, no one should be surprised if consumption returns only slowly.

Since we live in a consumption driven economy that spells trouble for the recovery. Later this week we will see the retail sales figures which will help shed light on the shape of consumption. We already know that car sales have risen slightly on the back of the government’s ‘cash for clunkers’ program which has only a short term effect, so the key data to watch for is the level of sales on other goods and services. Right now the early signs are for only mediocre progress.

Meanwhile tomorrow we will get a look at the Federal Deficit. So get ready for hoots of panic from the right wingers.

Addendum:

Let’s be clear: productivity improving is a good thing in the right context. But in this case it is improving because workers have taken a beating. You will read in the financial press all sort of hurrahs over this news. It implies breathing room for profits and therefore, perhaps, less need to cut jobs.

From a working person’s point of view a productivity gain is better when it comes from business investment and enhanced know-how. If firms invest to augment labor in order to extract greater profit which then turns up as higher wages then productivity growth is good for workers.

But productivity growth that comes from replacing labor, or from a reduction in hours worked, is less obviously a good thing.

Unless you own the business.

Remember: the only aspect of the economy that flourished in the Bush era was corporate profit. Wages barely improved at all. They are now back where they were in 2001. So far it has been a lost decade from labor’s point of view. And when you take into account the taxpayer burden to bail out the mess made by high rolling Wall Street types – which adds to the loss of the lost decade – I am surprised that the voters are not more surly.