Productivity Still Disappointing

Productivity has picked up a bit but far from enough to support the growth most people would like. Nor is business installing new equipment and technology at a rate that would improve the productivity picture significantly. Without capital investment, and the robust advances in output per hour it would foster, hopes of rising wages and rising profits, growth generally, will remain just that – hopes instead of realities.

Since the great recession of 2008-09, output per hour has grown at a painfully slow pace. To be sure, the first year of recovery, 2010, saw economy-wide output per hour jump a gratifying 3.4%. But this surge came less from fundamental improvements than simply because business had the opportunity at last to put underutilized staff to work. After this comparatively brief bump up, the productivity picture only brought disappointment. The year 2011 saw almost no increase in output per hour. In the years that followed, the yearly rate of productivity growth failed even to break above 1.0%. On average between 2012 and 2016, productivity grew at a paltry 0.75% a year.  Since increases in output per hour are the only way business can afford wage increases, it is little wonder that wages during this time stagnated. Had output per hour expanded at just the 2.3% a year it averaged between 2002 and the 2007, wages would have risen naturally, perhaps enough to have forestalled the recent push for minimum wage hikes.

Capital spending by business has, as always, set the tone for productivity directions. It, after all, is what gives labor the most advanced equipment and systems that enable it to produce more with the same effort. Because of the paucity of such investment spending during that time, labor hardly got the assist it needed and has received in the past. Between 2012 and 2016, business expanded its real outlays on equipment a mere 3.25% a year, barely one third of the rate averaged during the previous expansion between 2003 and 2006. The gap was smaller with spending on technology, what the Commerce Department refers to as “intellectual property products,” but still present. In the earlier recovery, it grew 6.0% a year in real terms. In the 2012 to 2016 period it barely broke 5.0% a year.

This poor showing in capital spending and consequently in productivity growth seems to have had three roots: First, the pain of the great recession remained fresh in the minds of business decision makers, rendering them more than a little cautious about any expansion plans. Second, American corporations faced a heavier tax burden than businesses did in most of the rest of the world, impelling American business to consider expansion abroad before it considered expansion at home. The capital spending overseas may have helped the companies, but not their American workers. Third, the Obama administration pursued a notably aggressive regulatory agenda that made business decision makers wary of any aggressive moves. Hopes of a change did emerge in 2017. Memories of the great recession had begun to fade and the Trump White House promised regulatory relief. The subsequent enactment of tax reform brought U.S. corporate taxes into line with most of the rest of the world, ending the previous inducement to choose overseas expansion over domestic.

At first, the picture seemed to brighten. During 2017, mostly in anticipation of the changed environment, business spending on new equipment jumped almost 10% in real terms. In 2018 it slowed a bit to a 6.0% rate of expansion but was still far faster than earlier in the recovery.  Meanwhile, spending on technology soared over 10%. Because it takes a while for such spending to translate into productivity growth, it would have been unreasonable to expect much response, but even so matters began to brighten. Output per hour picked up in 2017, rising 1.1%, more than twice the 0.5% recorded in 2016. In 2018, it grew again, by 1.2%.

More recent data, however, points to a return to earlier, disappointing patterns. According to the Census Bureau, new orders for non-defense capital goods have begun to drop. In February, the most recent month for which data are available, new orders for non-defense capital goods fell a steep 6.3%. Even stripping out the always-volatile aircraft component shows a 0.1% decline. Neither measure offers an encouraging indicator of such spending in the future.  If any given month’s data can mislead, the three months ended last February are hardly more encouraging. Overall orders for non-defense capital goods fell at a 1.6% annual rate during this time. And for the last twelve months, such orders show hardly any progress, having risen a mere 1.2%.

Though these orders figures hardly tell the whole story, the indication of future capital spending they offer bodes ill for future productivity gains. These figures also bode ill for future wage gains, for growth generally, and indirectly for any prospects that Washington can close the budget gap. It is, of course, entirely possible that the recent orders dip only reflects the volatile nature of these data.  Should orders turn up, as they did in 2017 and in early 2018, the picture would indeed brighten again. The next few months will tell. Right now, concern rules the day.

Milton Ezrati is Vested’s chief economist. Check out his blog, Bitesize Investing.

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