Recent reports on labor productivity in the U.S. have been underwhelming. Labor productivity growth is lagging behind the momentum of the mid-1990s through the early-2000s, creating additional concerns about the “new normal” of economic growth in the U.S.
As measured by output per unit of labor hours, its pace has slowed to a +1.2% average annual growth rate over 2007-2015, as revealed by Bureau of Labor Statistics data:
Source: U.S. Bureau of Labor Statistics
To better understand the implications, we have to first look at what actually drove the rapid acceleration of the mid-‘90s. Rapid innovation in information technology and internet usage almost single-handedly revolutionized the way we work. The days of manual calculations and communication bottlenecks disappeared, and software expedited virtually all phases of business from production to sales. Industries producing and using computers, internet and software saw their productivity soar, and as a result the output for each working hour climbed into historic territory.
Growth is measured relative to the period that came before it, and so it is logical that productivity gains would steadily taper off as the internet age grows older. Productivity is higher than it’s ever been; it’s just not growing as quickly because the gains are now incremental.
Also, the gains from the IT revolution came after a period of subdued productivity growth. A working paper in 2014 by John Fernald (Federal Reserve Bank of San Francisco) asserts that productivity growth was “exceptional” due to the tech-boom and was restored, prior to the Great Recession, to “normal” levels of 1973-95. The paper further suggests that this softening of productivity growth was concentrated in IT-producing and IT-using sectors.
Source: John Fernald (2014). “Productivity and Potential Output Before, During, and After the Great Recession.” Federal Reserve Bank of San Francisco, June 5, 2014.
The “Wait and See”
It is also worth considering that every innovation must be allowed some time before we can realize its full potential. That’s because even with a promising new technology, there may be a lag before its benefits can be most efficiently utilized and also for businesses to restructure their operations accordingly. Even after inception of the first series of computers, productivity did not really hit its stride until after the development of various software applications and the advent of cloud computing. Other recent innovations (that are also ongoing) in fields like robotics, the ‘Internet of Things’ and 3D printing may have tremendous potential yet to transform our world in unprecedented ways, so it is very much a “wait and see.”
Bottom Line for Investors
At Zacks Investment Management, we view the slowing of productivity from previous, IT-led lofty levels as not necessarily a bad thing. For one, it keeps deflationary pressures at bay and boosts employment of labor (at least for the short run). That is not to discount the importance of long-run improvements in productivity to raise living standards, but we also need to be patient for the latest innovations to work their way into improving labor quality. Also, productivity growth is still positive, so there isn’t much to be overly pessimistic about at the moment.
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