The mainstream media likes to tell us that US worker’ productivity has plunged in recent years, and that was true in 2011-2016. Yet US worker productivity/efficiency improved significantly the last couple of years to the best pace in nearly a decade – laying the groundwork for stronger wage growth, more economic expansion and continued low inflation.
The productivity of nonfarm workers is measured as the output of goods and services for each hour on the job. The Labor Department reported in May that worker productivity increased at a 3.6% seasonally-adjusted annual rate in the 1Q of this year. Over the last 12 months, productivity rose 2.4%. That was the best year-over-year gain since the 3Q of 2010, when the economy was just emerging from the Great Recession.
Productivity tends to be strongest in the early days of an economic recovery, as you can see in the chart below in 2009 and 2010. But as you can also see in the chart, worker efficiency fell off a cliff in late 2010 and 2011, and it remained low until the bottom in 2016.
Accelerating productivity improvement nearly 10 years after the recession ended raises hopes that a combination of more efficient workers and Americans rejoining the labor force could provide necessary fuel to extend one of the longest expansions in the post-World War II era.
Unfortunately, most forecasters suggest that last quarter’s exceptionally strong productivity is unlikely to be consistently repeated because output gains will slow as stimulus from tax cuts and federal spending increases fades.
Yet the good news is that the US economy has moved into a trend of improved productivity after a very weak period. It should also mean the economy can run hotter for longer without causing inflationary pressure. Let’s hope so!
While the latest data shows worker efficiency is improving, the pace of gains is near average by historical standards. Since the end of World War II through 2018 – including both expansions and recessions – productivity rose at an average annual rate of 2.1%. In the previous economic recovery, from 2000 to 2007, productivity rose at a 2.7% annual rate.
Productivity improvements are a key ingredient for the US economy to maintain a 3% growth rate, a goal of the Trump administration. That is especially true as a tight labor market and low unemployment make it more difficult for employers in many industries to fill job openings.
Productivity growth in the longer run is also associated with faster wage gains, which we are beginning to see. If workers are more efficient, employers can raise pay without cutting into profit margins or raising inflation. The relationship can also work the other direction: Higher wages may prompt businesses to invest in labor-saving technology.
The recent strong gains in productivity could also be a sign that the uptick in investment following tax-law changes passed in 2017 means businesses are increasing spending on the technology and tools necessary to increase worker output. Some firms have turned to automation – from factory machines to shelf-scanning robots – to ramp up output while growing hours worked and payrolls more slowly.
There is also encouraging worker efficiency data from other countries. That is a positive development because productivity changes are often global in nature. While this level of change doesn’t happen in a single quarter, or a year in most cases, it can happen rapidly if conditions are right, as we can see in the chart above.
For example, Bautex Systems LLC, a San Marcos, Texas company (just south of Austin), makes building materials. It expects better than 60% year-over-year growth in sales this year without needing to add factory staff. The company currently employs about 25 workers that produce enough building materials – which are required to construct a Super Walmart or other comparable box store – every two days.
“The plant is fully automated. The workers never need to touch anything,” said company President Paul Brown. Workers mainly move materials and load trucks.
The 10-year-old company is seeing rapidly increased demand for its products, which can be installed less expensively and more quickly than traditional building methods – at a time when construction companies in Texas are struggling to find workers and are facing higher costs for materials, particularly steel, due to tariffs.
The bottom line is: Worker productivity has been rising rapidly since 2016, and the current trend has more room to run, even this late in the economic cycle. And if productivity continues to rise, wages can continue to rise, without sending inflation higher. That’s all good news to know!
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