This was my Day-to-Day Weblog on Deflation during the US deflation alert of 2002-2003. Since I am by no means convinced that this issue is compltely over the blog remains here in suspended animation, pending developments which might make its resussitation worthwhile. More Detailed in-depth commentary, analysis and links on the deflation phenomenon can be found on the Deflation Page on My Website
Saturday, November 08, 2003
Staggering Rise in US Labour Productivity
US labour productivity may have risen at an astounding 8.5% in the third quater, at least that's what Bloomberg are telling us. Following close on the heals of a 7.2% growth in GDP for the same quarter these numbers clearly are incredible: frighteningly so. It is clear that something pretty important is happening, but I fear we may need to wait for the dust to settle before we can see what that 'something' actually is.
US labour productivity may have risen at an astounding 8.5% in the third quater, at least that's what Bloomberg are telling us. Following close on the heals of a 7.2% growth in GDP for the same quarter these numbers clearly are incredible: frighteningly so. It is clear that something pretty important is happening, but I fear we may need to wait for the dust to settle before we can see what that 'something' actually is.
U.S. worker productivity may have grown in the third quarter at the fastest pace in more than a year as economic growth surged, economists said they expect a government report to show today. The Labor Department's gauge of how much an employee produces for every hour worked may have risen at an 8.5 percent annual rate from July through September, the most since the first quarter of 2002, when the economy was emerging from recession, according to the median of 64 estimates in a Bloomberg News survey. In the second quarter, productivity rose at a 6.8 percent rate.
Last quarter saw the economy expand at a 7.2 percent annual pace, the most in 19 years. During those three months, companies cut 41,000 workers from payrolls, suggesting remaining employees were more efficient. The resulting boost to corporate profits may soon lead to more investment and renewed hiring. "While it will be difficult to grow at quite that pace in coming quarters, it seems clear we have entered a new phase of economic expansion,'' Treasury Secretary John Snow said a speech to the Economic Club of Washington. Private economists agree. "As corporations continue to register higher profits, you will ultimately see new hiring programs kick in,'' said Bill Sullivan, a senior economist at Morgan Stanley in New York. "Ultimately these productivity gains slow and businesses must begin to raise payroll levels.''
The Labor Department issues the report at 8:30 a.m. Washington time along with statistics that may show a decline in claims for unemployment benefits. New applications may have dropped by 6,000 in the week ended Saturday to 380,000, based on the median of forecasts. Last week would be the fifth in a row for claims to hold below 400,000, the longest such stretch since six weeks in January and February.
The ability to produce more with fewer workers reflects past investments in computers and other equipment that are still making employees more efficient. From 1996 through 2000, productivity gains averaged 2.5 percent a year, more than a percentage point higher than the 1976-1995 average of 1.4 percent. "Much of the strength we saw in the third quarter is likely to continue,'' Snow said in his speech. ``This is not a fleeting glimmer -- there is real muscle behind the growth trend.'' The surge in productivity "probably is a lagged tribute to the 1990s boom in capital investment,'' said Bill Sharp, a senior economist at J.P. Morgan Securities Inc. in New York.
Greater efficiency may have damped unit labor costs, or the amount paid for each unit of production, according to the survey. Costs may have dropped 5 percent last quarter, the most since the first quarter of 2002, following a 2.8 percent decrease in the previous three months, according to the survey median. Falling costs together with rising sales are providing a lift to corporate balance sheets. Third-quarter profits are increasing at the fastest pace in more than three years. Earnings have risen 21.7 percent, based on results from 80 percent of the Standard & Poor's 500 companies reporting so far, according to Thomson Financial. Almost two-thirds of the companies that reported profits topped the average estimate.
Productivity historically slows in the quarter following a surge. It has grown at a 7 percent annual pace or more 26 times since the end of World War II. In the subsequent three-month periods, it dipped to an average of 1.6 percent while companies hired an average of 481,000 workers. "These productivity numbers aren't sustainable,'' said Russell Sheldon, a senior economist at BMO Nesbitt Burns Inc. in Toronto. If business leaders ``remain cautious at this point in the recovery, other companies are going to get the lion's share of growth, and most aren't going to let that happen.''
Companies may have added 65,000 workers to payrolls last month, following a gain of 57,000 in September, the Labor Department may report Friday, according to the median of 68 estimates in a separate survey. September's gain was the first since January. The unemployment rate may have held at 6.1 percent for a third month, the survey found.
For their part, company leaders are hesitant to jump the gun on hiring. "With all the gains that have been made in productivity, employment is going to come back very gradually,'' said Michael Jackson, chief executive officer of AutoNation Inc., the largest U.S. retailer of new and used cars, in a television interview with Bloomberg News last week. "And I see a gradual recovery from the consumer perspective, not roaring back.'' The economy may grow at a 4 percent annual rate this quarter as consumer spending rises at a slower rate, according to the median estimate of 56 economists surveyed by Bloomberg News this month. Household spending, which accounts for about 70 percent of the economy, may grow at a 2.8 percent rate compared with a 6.6 percent increase last quarter that was the biggest since the third quarter of 1997.
Source: Bloomberg
LINK
The 'Lump of Structural Reform' Fallacy
I must have had a hard week, since I find myself leaning more and more on Joerg for inspiration. But I really do think he has a good point. Structural reforms are being converted into something quasi-physical, that need to be handed round and round...........and round. Apart from making ourselves all extremely dizzy, isn't there something rather self-defeating in all this. Stephen Roach sums the problem up rather nicely:
Right and wrong. Right, in that productivity is a good thing, and if you can increase productivity by moving your economy out of agriculture and into, say, industry (think France and Japan in the 70's and 80's) then you can obviously live better, or if you can move out of industry into high-end services then ditto. But, and here is the big point, if you move into what are intrinsically low-value labour-intensive services, but gain the productivity by everybody running faster, then what exactly have you gained? Roach is also passing the white rabbit quickly from one hand to the other when he insinuates that recent growth has come mainly from increased productivity: in fact recent growth has come mainly from two sources, increasing the level of 'participation' in the economy (whether through more women working, or because we have a higher proportion of people in the 16 - 60 age group) or from increasing the quantity of capital in play (ie either using more labour or using more capital). So in one sense economic growth depends on imagination and creativity: using our inventive capacities to find ever newer ways of creating wealth and well-being. My real problem comes when Roach starts to talk about 'severe consequences' and 'threats' to income and security. 'Good' productivity doesn't necessarily have to be tough medicine: whilst trying to defend unproductive jobs is. I have just spent the week (virtually speaking) way down south of the Rio Grande. I have set up what I consider to be an extremely interesting working goup (of which you'll hear more later), and all without moving outside the office, except, that is, in search of coffee and light relief. None of this is 'painful'. It isn't painful because we're doing more for less. But too many of the structural reforms involve doing the same for more (effort): I personally don't see what this has got to do with growth. We are going into a difficult adjustment period there is no doubt about that. In view of the sacrifices we may all be called upon to make, maybe it would be better if we were all a little clearer about why we are doing it.
I must have had a hard week, since I find myself leaning more and more on Joerg for inspiration. But I really do think he has a good point. Structural reforms are being converted into something quasi-physical, that need to be handed round and round...........and round. Apart from making ourselves all extremely dizzy, isn't there something rather self-defeating in all this. Stephen Roach sums the problem up rather nicely:
Now one of the problems I think many of us (even those of us who consider ourselves 'admirers') have with Roach are those little 'slight of hand' arguments he wheels out from time to time. One of these is the 'world GDP' argument (for new readers, I think 'world GDP' is a nonsense concept: ie it doesn't mean anything). Another is the idea that protectionism caused the great depression (which as Eddie keeps pointing out is just plain false). Now we have another one: that the road to sustained economic growth rests almost exclusively on a foundation of sustained productivity enhancement driven by structural reforms.To the extent that the road to a renewal of economic growth rests on a foundation of sustained productivity enhancement, market-based reforms become an essential ingredient of the global growth equation. Primary focus on the rhetoric of currency policies deflects attention from this critical objective.
It’s not hard to understand why politicians and policy officials would rather turn their attention elsewhere. The structural reforms required to sustain productivity-led growth are often the toughest medicine for any economy to take. That’s because they usually entail a reworking of social contracts between governments, businesses, and workers. As such, structural reforms can threaten deeply entrenched conventions of job and income security -- threats that have enormous social and political implications. In light of these severe consequences, there is a natural inclination to avoid reforms. Yet in the end there is no other choice. It takes courage and vision to look through the short-term pain and see the long-term gain. In my view, it also takes pressure -- pressure that leaves an economy and its leadership with no option other than reform. To the extent that a strong currency achieves such an outcome, that is a good thing.
Source: Morgan Stanley GEF
LINK
Right and wrong. Right, in that productivity is a good thing, and if you can increase productivity by moving your economy out of agriculture and into, say, industry (think France and Japan in the 70's and 80's) then you can obviously live better, or if you can move out of industry into high-end services then ditto. But, and here is the big point, if you move into what are intrinsically low-value labour-intensive services, but gain the productivity by everybody running faster, then what exactly have you gained? Roach is also passing the white rabbit quickly from one hand to the other when he insinuates that recent growth has come mainly from increased productivity: in fact recent growth has come mainly from two sources, increasing the level of 'participation' in the economy (whether through more women working, or because we have a higher proportion of people in the 16 - 60 age group) or from increasing the quantity of capital in play (ie either using more labour or using more capital). So in one sense economic growth depends on imagination and creativity: using our inventive capacities to find ever newer ways of creating wealth and well-being. My real problem comes when Roach starts to talk about 'severe consequences' and 'threats' to income and security. 'Good' productivity doesn't necessarily have to be tough medicine: whilst trying to defend unproductive jobs is. I have just spent the week (virtually speaking) way down south of the Rio Grande. I have set up what I consider to be an extremely interesting working goup (of which you'll hear more later), and all without moving outside the office, except, that is, in search of coffee and light relief. None of this is 'painful'. It isn't painful because we're doing more for less. But too many of the structural reforms involve doing the same for more (effort): I personally don't see what this has got to do with growth. We are going into a difficult adjustment period there is no doubt about that. In view of the sacrifices we may all be called upon to make, maybe it would be better if we were all a little clearer about why we are doing it.
