In September, the US Bureau of Labor Statistics revised its earlierestimate of Q2 nonfarm business sector labor productivity. Following therevision, the report showedworker productivity declined at a -0.7% annual rate in the quarter. Sowhat drove the decline? Not a dip in output, which rose at a +1.3%annual rate. Rather, it was that a +2.0% gain in average hours workedoutstripped the rising output. Which, while the numbers vary somewhat,is very similar to Q1 2011.
Without doubt, productivity is a critical component of the US economyand one of the fundamental strengths behind America's highly competitiveprivate sector. So it isn't terribly surprising some media sourceshave recently homed in on the headline dip and drawn some relativelyvast conclusions. Some speculate this is bad for private-sector hiringprospects. Others postulate it means government estimates of where GDPwill be five years from now are wrong. Others speculate it means higherfederal budget deficits.
A bit of perspective: Government revisions to old data are normal, andthese archeological digs aren't typically very impactful for markets.But also, that productivity dipped in Q1 and Q2 isn't abnormal in anexpansion. Typically, productivity sharply rises as recession abates,followed by much more uneven growth. Over time, the result is a moregradual increase in productivity during expansions overall.
And that makes sense��as businesses cut costs to stay afloat duringrecessions, they pare back hours for workers, maybe even lay folks off.Essentially, they try to wring every bit of output they can from eachworker and every hour worked. But as the economy��and businesses'sales��recover, increasing volume eventually stretches these workers tothe limit. Even with technological advances, there's still a point atwhich a bare-bones workforce can't meet demand in a timely fashion,which can cost a company sales��something management would obviously liketo avoid. All this is essentially a cog in the economic machineultimately causing ! growth t o work through slack in the labor force(unemployment).
And that seems to be what's likely at work here. After all, UScorporate revenues have risen for seven consecutive quarters (Q3 willlikely mark eight)��at a 12% clip in Q2.[i] And it isn't like actualbusiness output fell��it grew! So with that backdrop��a growing economy,increasing sales and rising private-sector output��two quarters ofslightly shrinking productivity doesn't strike us as a bad thing at all.In fact, it could represent the fact many businesses have added topayrolls��and may have to further increase them soon. Now, as businessesmove forward, there's little reason productivity couldn't reacceleratein volatile fashion. Firms could, for example, spend cash on technologyupgrades ultimately buoying output per hour. So digging below theheadline number shows a couple quarters of slightly dipping productivityisn't truly some major negative��or necessarily negative at all.
But there's also speculation volatile productivity statistics mean thegovernment's long-term growth projections are wrong. Ask yourself this:When have long-range government projections been right? (Crickets.)After all, these are the very folks who brought you 2000-era forecastsof budget surpluses for a decade. Just a tad off. Ultimately,this all seems to us fairly typical productivity volatility��andvolatility off what had been very high productivity levels to boot.
source: Market MinderDisclaimer: This article reflects personal viewpoints of the author and is not a description of advisory services by Fisher Investments or performance of its clients. Such viewpoints may change at any time without notice. Nothin herein constitutes investment advice or a recommendation to buy or sell any security ot that any security, portfolio, transaction or strategy is suitable for any specific person. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.{$end}
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