This overlooked US data point is the core of the big lingering economic question
On Thursday morning we learned that labor productivity grew at a better-than-expected 3.1% rate in the third quarter of this year.
This is good.
Compared to a year ago, however, productivity growth went nowhere.
This is not good.
And on this basis, the latest productivity data reiterates the most common story we find in US economic data these days: some things are good, some things are bad.
In short, the pessimists and optimists both get to have their say.
Productivity, which is simply economic output divided by the economy’s collective hours worked, has been on a downtrend over the last several decades. This has led economists and commentators to wonder what is wrong with the US economy. (“We don’t win anymore” etc. etc.)
Robert Gordon, an economist at Northwestern, argued in his book “The Rise and Fall of American Growth” published earlier this year that a series of innovations like running water, microwave ovens, and air transportation (among thousands of other advances that raise the standard of living) did and can happen only once. This argument says the productivity booms we saw in the 20th century, then, won’t be repeated.
Other economists, among them Neil Dutta at Renaissance Macro, have argued that a dearth of good employees will force companies to boost productivity from existing workers by increasing investment.
Last week’s first look at third-quarter GDP indicated an uptick in private fixed investment, bucking a long-running trend of declines in this measure. And so on this basis it looks like the economic necessity of squeezing more productivity out of the existing pools of workers is playing out.
In a note to clients following Thursday’s report, Dutta also noted that this productivity is good news for corporate profits as the increase in productivity kept a lid on unit labor costs — or how much employers pay per unit of output — which helps the bottom line. Unit labor costs were up just 0.3% in the third quarter, though they’ve risen 2.3% over the last year.
“Recall that profits are an identity, selling prices less unit labor and unit non-labor costs,” Dutta writes. “Inflation is rising while productivity has room to recover has growth picks up.”
Last week, Yahoo Finance’s Sam Ro noted that earnings for the S&P 500 had actually turned positive year-over-year, the first time in five quarters America’s biggest company had seen bottom-line growth.
And while the extended “earnings recession” was long-argued by some strategists and economists to be an ignorable event due to the impact low oil prices and a rising US dollar had on America’s collective corporate profitability, others noted that at some point businesses seeing continued profit declines would cut back on hiring and investments.
A reversal of this trend, then, is good not only for those businesses and their shareholders who enjoy a return to profitability but also the broader prospects of the US economy.
But looking beyond the third quarter jump, again, productivity is still flat compared to last year. And with wages rising, unit labor costs could again shoot higher and cut off the prospects for a marked improvement in corporate profitability.
“One good quarter for productivity does not change the trend, and note that year-over-year productivity growth is exactly zero,” writes Ian Shepherdson, an economist at Pantheon Macro.
Some good, some bad, and same as it ever was for the US economy in 2016.
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Myles Udland is a writer at Yahoo Finance.
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