Rabbit at Rest
JACKSON HOLE, Wyo. -- The nugget below comes from a
delivered in October.
Finally, because the measured level of productivity in the noncorporate business sector exhibits noncredible weakness for substantial spans of time, I believe data for the nonfinancial corporate sector afford a more accurate, though admittedly more narrow, measure of productivity performance. And here the numbers are still more impressive, nearly 3% on average over the past five years, and more than 4% over the past two. By this measure, productivity growth in the 1970s and 1980s also averaged about 1 3/4% per year. Moreover, the acceleration in productivity appears reasonably widespread among nonfinancial corporate firms beyond the high-tech industries themselves, even though gains in output per hour in the advanced technology companies have verged on the awesome.
A history of those
numbers (as opposed to the popularly reported nonfarm
business ones) is laid out in the table below.
A 5.7% year-on-year increase in output less a 1.8% year-on-year increase in hours worked yielded (roughly) a 3.8% year-on-year increase in this measure of productivity during the third quarter. (Also note that subtracting the increase in unit labor costs from the increase in compensation produces the same result; not all calculations are precise due to rounding.) Because it took an acceleration in hours worked to preserve the same pace of output increase, the rate of productivity growth decelerated between the second quarter and the third.
We've already talked a lot about productivity a lot in this space -- too much, some would doubtless argue -- but it's important enough that we'll mention it again today. Specifically, your narrator wants to contest that this latest round of key productivity numbers is (on balance) bearish. For three reasons.
The first is that the productivity improvement we're seeing this year (the 1999 productivity increase is on track to go down as 4.1%) doesn't come close to matching the ones we saw (on average) during the past three. This is not only odd -- if the technology boom that began five years ago has already begun to pay real dividends, shouldn't productivity improvements get bigger now that we're even deeper into it? -- but, from a monetary-policy standpoint, it is also worrying. The nugget below comes from a
speech G delivered back in May.
If productivity growth should level out or actually falter because additional technology synergies fail to materialize, or because output per hour has been less tied to technology in the first place, inflationary pressures could re-emerge, possibly faster than some currently perceive feasible.
The second is that yes, the fact that the increase in unit labor costs will end up showing a 1999 deceleration (1% for the first three quarters of this year vs. 1.3% for all of last) is bullish.
For, obviously if productivity growth slows, unit labor costs would rise, first pressuring profit margins, and then prices. Indeed, we cannot rule out such a process if labor productivity growth simply levels out.
But the conditionality G lays out -- first productivity, then unit labor costs, then margins, then prices -- says (at least to this correspondent) that the fact that unit labor costs are not yet accelerating is less important than the fact that productivity improvements are already slowing.
The third is the "ongoing-strength-in-demand-in-excess-of-productivity-gains" thing that the central bank first
mentioned back in May. A peek at the final sales table we presented in a recent
column shows that where productivity improvements are tired, the pace of domestic demand is clearly not.
Today we end with three productivity-related quotes. The first comes from
Steve Roach, the second comes from
Meyer and the third comes from a
Call it the dismal science if you must, but economics has done a reasonably good job in rendering the ultimate verdict on virtually every phase of the so-called Industrial Revolution. Whether it was the mechanization of agriculture, the railroad, the advent of the factory assembly line, electricity, the steam engine or the telephone, economics held the key to success or failure. Ultimately, it all boiled down to productivity -- where the rubber meets the road in the long continuum of economic history. ... The arbiter of national productivity growth is actually a very stern test. It rules out the paradigm of product and brand substitution that now seems to be driving the feeding frenzy in Internet stocks. Replacing your corner bookstore with its electronic analog merely reshuffles the cards in the same deck. The same is true of virtually all other facets of electronic commerce. ... Productivity is not about working longer or harder. It's all about generating more value-added per unit of work time. That's where we come full circle back to the Internet. Can the Web truly alter the balance between outputs and inputs, enabling the nation to produce more with less? Or is it simply another one of those alluring technology-driven advances that facilitates the substitution of leisure for work time?
But, from a modeling or even analytical perspective, what framework is offered to replace the traditional paradigm? I am not a proponent of the new economy school. I admit that I do not fully understand what new paradigm is being offered as the heir apparent to the old paradigm. In the extreme, it appears to hold that there are no limits -- no level of capacity that, if exceeded, induces higher inflation and no trend rate of growth that, if consistently exceeded, implies an increase in production relative to capacity leading, over time, to excess demand and higher inflation. I have to admit the absence of such limits makes absolutely no sense to me.
Computerworld columnist Paul Strassmann has expounded at great length on the relationship between technology spending and productivity, and he's published a book disputing the theory that more of the former increases the latter. Of course Mr. Strassmann is doing silly things like comparing technology spending and profits as reported to the SEC, and many of these New-Era zealots hate to let something as insubstantial as facts get in the way of a good fad.
And surely those more than satisfy your recommended daily allowance of vitamin Contrary.
The "Clicks & Mortar" piece in the Dec. 6 issue of
The New Yorker
is worth a read.
latest from that loopy Irishman? That column (especially the writing) never fails to impress.
How do you spend most of your Internet time?
On work-related things.
On sports and gambling.
On researching and tracking personal investments.
On emails (either writing them or forwarding stupid ones).