The Good News: Worker Productivity and Profits Per Workers Are At Record Highs. The Bad News: That Probably Means A Record Jobless Recovery
The top chart above shows that real GDP in the fourth quarter of 2010 was slightly higher (by 0.14%) than real output in the fourth quarter of 2007 when the recession started. But even though the economy has made a complete recovery from the Great Recession in terms of real economic output, the U.S. economy is producing more real GDP today than in 2007 with 7.3 million fewer private sector jobs. This current economic recovery is an amazing story of huge increases in worker productivity (producing more output today with 6.3% fewer private sector workers than in 2007) that might be unprecedented in U.S. history over any three year period of time, or in any post-recession period.
What does that surge in worker productivity mean for the bottom lines of American companies? The bottom chart above shows that real corporate profits per private sector job reached an all-time record historical high of $11,552 in the fourth quarter of 2010 (measured in 2010 dollars). That's 65% higher than the recession-low of about $7,000 per worker in fourth quarter of 2008 and 7.5% above the pre-recession high of $10,740 in 2006.
That's the good news about record-high worker productivity and the resulting record-high real corporate profits per private sector worker. The bad news is that these trends might translate into a record-length "jobless recovery," as U.S. companies have been able to expand output and profits to record levels, but with millions and millions of fewer workers. Taken together, these two trends might explain why many companies have been reluctant to hire back more workers - why increase the labor force when output and profits are at record-levels?
A recent AP news report discusses these trends:
"U.S. workers have become so productive that it's harder for anyone without a job to get one. Companies are producing and profiting more than when the recession began, despite fewer workers. They're hiring again, but not fast enough to replace most of the 7.5 million jobs lost since the recession began.
Measured in growth, the American economy has outperformed those of Britain, France, Germany, Italy and Japan — every Group of 7 developed nation except Canada, according to The Associated Press' new Global Economy Tracker, a quarterly analysis of 22 countries representing more than 80 percent of global output.
Yet the U.S. job market remains the group's weakest. U.S. employment bottomed and started growing again a year ago, but there are still 5.4 percent fewer American jobs than in December 2007. That's a much sharper drop than in any other G-7 country. The U.S. had the G-7's highest unemployment rate as of December. Canada and Germany have actually added jobs since the recession ended in June 2009.
Panicked by the 2008 financial crisis and deepening recession, U.S. employers cut jobs pitilessly. They slashed an average of 780,000 jobs a month in the January-March quarter of 2009. "My sense is there was much more weeding out of the weakest workers — the ones they didn't want," says Harvard economist Kenneth Rogoff.
Yet after shrinking payrolls, many companies found they could produce just as much with fewer workers. And with that higher productivity came higher profits. By July-September quarter of 2010, U.S. corporate earnings were 12 percent more than when the recession began. By contrast, corporate profits fell 6 percent in Japan and 16 percent in Canada from the October-December quarter of 2007."
25 Comments:
It was inevitable real GDP would surpass the Q4 2007 peak.
Yet, the output gap is huge:
The Legacy of the Great Recession
March 1, 2011
In the fourth quarter of 2010, the demand for goods and services (actual GDP) was about $822 billion (5 percent) less than what the economy was capable of supplying (potential GDP).
When expansions are well underway, after recessions, actual and potential GDP are roughly equal and sometimes actual GDP exceeds potential GDP.
The Output Gap
January 19, 2011
Paul Krugman
"...there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce (over four years; 2008-2009-2010-2011, based on real output).
When does increased productivity exceed job growth permanently?
BLS: Productivity change in the nonfarm business sector, 1947-2010
Average annual percentage change
1947-73 2.8%
1973-79 1.1%
1979-90 1.4%
1990-00 2.1%
2000-07 2.6%
2007-10 2.8%
http://www.bls.gov/lpc/prodybar.htm
This is another reason the Inflation Chicken Littles are squawking up the wrong tree.
Unit labor costs have been falling in the United States, and have been for two years. Housing Affordability is at an all-time high.
Explain to me how you get a sustained inflation when unit labor costs are falling. That is 60 percent of business costs. Add to that, commercial rents of all kinds are very soft. Factory retail office--soft, soft, soft.
Inflation is not baked into the cake--quite the opposite, deflation is baked in, and only some commodities inflation is keeping prices from falling.
BTW, I think Dr. Perry errs, that higher productivity will ultimately mean more jobs. Your future may be in a service industry, working at a spa, hotel, or massage parlor. Pool halls.
We could also see a great American comeback in manufacturing, if the dollar stays low, and Chinese costs keep going up, and productivity keeps rising. After a point, the labor component gets so small, that it makes sense to make goods domestically.
And the world is running out of law-cost non-corrupt manufacturing platforms.
"pitiless"? If they were anything close to pitiless, they'd have dumped those useless workers long ago, rather than letting them drag them down until they were forced to throw them off a sinking ship. The reason the US keeps beating everybody else is because dumb ideas and bad companies get chucked in these periodic retrenchments called recessions. Japan was able to get close to our general level but has since stagnated backwards because they haven't grasped this basic lesson: that it's the free market in which unprofitable companies fail that makes the US economy so dynamic and powerful. Rest assured, these suddenly flush companies will get greedy again, as the fear phase inevitably wears off, and there is another boom just around the corner. This next one is going to be big, but it will destroy many existing businesses, from newspapers to universities, and that's the way it's going to be from here on out. :)
Perhaps the productivity increase is not as dramatic as the aggregate statistics would suggest.
Consider that employment in many low productivity industries - construction, for example - has declined sharply since 2007. At the same time, employment in higher productivity industries - health care and government are two - has increased or remained the same. When the mix of employment changes in this manner, the overall productivity of the nation appears to have dramatically increased. But much of that increase is simply a change in mix.
Even within sectors, the mix of employment can change. Productivity in refineries is much higher than productivity in appliance manufacturing or in furniture manufacturing. If employment in higher productivity manufacturing industries grows while employment in lower productivity ones shrinks, the overall productivity of manufacturing will automatically rise. That would be true even if no single manufacturing industry showed productivity increases.
Aggregate statistics can be misleading.
Jet Beagle says: "Consider that employment in many low productivity industries - construction, for example - has declined sharply since 2007. At the same time, employment in higher productivity industries - health care and government are two - has increased or remained the same."
Why do you assume construction is a low productivity industry, while health care and government are high productivity industries?
U.S. productivity may be even higher with more construction workers and fewer health care and government workers.
I suspect, there are too few workers in the construction industry compared to workers in health care and government.
Anyway, how do you measure productivity in government, for example. By how much capital it destroys? How many regulations it implements? How much it adds to budget deficits?
Health care is the most heavily regulated industry in the U.S. Does filling out more government paperwork increase productivity?
There are so few houses being built that if home construction doubled, productivity would likely soar.
benji-
"Explain to me how you get a sustained inflation when unit labor costs are falling."
that is a stupid, circular argument.
you cannot get unit labor costs without first knowing inflation. you need to know real output to calculate it.
thus, if you understate inflation, you get declining unit labor costs and apparent productivity. it all flows from the same error.
however, it is completely circular to claim that falling unit labor costs are proof of low inflation. they are calculated using the inflation figures, so, it is a completely circular augment. you are ultimately saying that inflation is low because inflation is low. it proves nothing if your CPI figure is wrong and provides no check at all on its accuracy.
if inflation assumptions are incorrect, they will make the unit costs wrong.
this is the sort of elementary mistake you make all the time. do you not even know how to compare units to check validity?
if you have an econ degree, your professors ought to be ashamed. this is the sort of mistake that would get you failed in macro econ 1...
Does the GDP calculation include government spending and if so is that the major source of the increase in GDP?
Labor is more productive when more capital is used per worker. Since the passage of Obamacare together with the drive to promote unionization, the future expected price of labor is increasing relative to capital. This artificial increase in the price of labor relative to capital results in a substitution toward capital and away from labor. The apparent increase in labor productivity is due to a misallocation of resources. The apparent long term increase in unemployment reflects this inefficiency. Given this unemployment, record highs of worker productivity and profits per worker are bad news. Only at full employment would these measures be good news.
Benji, you are an employer. What will it take for you to hire additional employees?
Morgan Frank-
Evidently you are unique, in that you alone can ferret out at the current CPI understates inflation, while even peer-reviewed papers are being published by the American Economic Review that the CPI overstates inflation.
Yes, measures of inflation are updated from time to time, for obvious reasons.
BTW, if we assume what you say is true, and prices are up 150 percent in the last while, what does that say about gold prices?
"... record-high real corporate profits per private sector worker..."
We have the combination of high government employment and high unemployment. The number of private sector workers is down, which results in the record high ratio. (Private business profits are not at a record high.)
This trend of increased productivity cannot last long. Many private companies have cut back on capital expenditures (including automation) and on research and development. Without those, productivity improvements will dwindle.
Regime uncertaintly continues to dampen the recovery. Private businesses are holding record amounts of liquid assets instead of funding expansions and R & D. This situation is unlikely to end while Obama is president.
benji-
apparently you have your head so deeply in the sand that you cannot see the price increases taking place right before your eyes and are so credulous that you can ignore the fact that pretty much no raw data agrees with the CPi or see how broken it's methodology is.
i'd lay this argument out for you again, but you clearly seem unable to comprehend it.
more telling, it does not matter whether CPI is correct or not in assessing your previous argument. it's still circular. you cannot use unit labor costs calculated using CPI to say anything meaningful about CPI.
i have no idea what you are asking about gold.
it's a commodity that is largely sensitive to inflation and (because it is dollar denominated) the dollar exchange rate.
that combined effect would imply that gold should, all else equal, have increased in price about 300% since 2001. (which is approximately the increase in the constant commodity index)
the fact that it's up more simply shows that other factors are involved as well.
both these metrics are telling you that there has been an enormous amount of inflation and dollar debasement in the past decade.
and i am hardly unique in this belief.
ask pimco or schab or greenlight or many other top money mangers.
do you really find it so difficult to believe that a government agency like the BLS might find itself pursuing political goals as opposed to strict accuracy?
you seem distrustful of government in many cases. why do you trust them to suddenly become honest when it comes to statistics?
It was inevitable real GDP would surpass the Q4 2007 peak.
Yes but that does not mean that it has been. With the BLS playing fast and loose with the inflation data the numbers can be made to produce a number of different pictures of the economy.
Peak Trader,
I was referring to the government's measure of GDP and the number of employed workers. I'm pretty sure that's how aggrergate productivity is measures - a measure which I believe to be meaningless, but the one which Professor Perry posted about. That's the whole point of my comment - that aggregate numbers are often meaningless or distorted.
Medical practitioners - physicians, registered nurses, and skilled medical technicians - in general earn more than workers in the residential construction and related industries - roofers, carpenters, wholesale lumber workers, and home mortgage processors.
The immediate effect of a slowdown in residential construction is unemployment of the least skilled - and lowest paid - workers in that industry.
The health care industry has been growing for decades - long before Obamacare. Although that industry still employs a sizeable number of low-skilled workers, the largest occupation in that industry is registered nurses. Registered nurses today receive fairly high compensation - at least relative to the construction and related industry employees who are unemployed.
Not sure if you got the point of my comment at all. Your response seems to be more ideological than a simple look at the statistical facts.
"Taken together, these two trends might explain why many companies have been reluctant to hire back more workers"
Just in case anyone has missed the point of my previous comments:
Much of the increase in productivity is a change in the mix of GDP generation. It's not only that company X in Industry A is producing more output with fewer workers. It's also that high productivity companies X and Y in higher productivity sector A are growing while low productivity company Z in lower productivity sector B is out of business. Examples (because Peak Trader doesn't want to consider health care and government as "high productivity industries):
- highly productivity refineries and chemical plants are creating more ouput with the same number of workers;
- low productivity roofing installation companies have much less work to do (relative to 2007) due to the housing slump.
"Taken together, these two trends might explain why many companies have been reluctant to hire back more workers"
Just in case anyone has missed the point of my previous comments:
Much of the increase in productivity is a change in the mix of GDP generation. It's not only that company X in Industry A is producing more output with fewer workers. It's also that high productivity companies X and Y in higher productivity sector A are growing while low productivity company Z in lower productivity sector B is out of business. Examples (because Peak Trader doesn't want to consider health care and government as "high productivity industries):
- highly productivity refineries and chemical plants are creating more ouput with the same number of workers;
- low productivity roofing installation companies have much less work to do (relative to 2007) due to the housing slump.
That's the whole point of my comment - that aggregate numbers are often meaningless or distorted.
You are right about aggregate numbers. But imagine a world in which the economics profession has to admit what you know to be true.
The health care industry has been growing for decades - long before Obamacare. Although that industry still employs a sizeable number of low-skilled workers, the largest occupation in that industry is registered nurses. Registered nurses today receive fairly high compensation - at least relative to the construction and related industry employees who are unemployed.
Let us take a look at the healthcare industry. All that spending but little change in life expectancy. How is that productive? And would we have been better off to have more personal trainers and nutrition consultants than nurses and doctors?
Much of the increase in productivity is a change in the mix of GDP generation. It's not only that company X in Industry A is producing more output with fewer workers. It's also that high productivity companies X and Y in higher productivity sector A are growing while low productivity company Z in lower productivity sector B is out of business. Examples (because Peak Trader doesn't want to consider health care and government as "high productivity industries):
- highly productivity refineries and chemical plants are creating more ouput with the same number of workers;
- low productivity roofing installation companies have much less work to do (relative to 2007) due to the housing slump.
I think that you are just engaging in cherry picking. From what I know of the chemical industry it is growing slower than GDP. And while American companies are huge global players, they produce many of their products abroad. And from what I can tell by listening in on odd conference calls and reading the odd article global chemical manufacturing has grown much faster than the American chemical industry. That would not happen if American chemical workers are so much more efficient than foreign workers. Of course, productivity also has a lot to do with capital investment. One expects that capital intensive industries like refineries and chemical manufacturing facilities to become more productive with time as investment in machinery and automation requires fewer workers per unit of product made.
But none of this changes the bigger picture argument. The BLS has tried to imply that American productivity was growing at unrealistic rates before. And people who pay attention to context miss the obvious; yes, in a recession you can demand that employees produce more for less money. But is that 'productivity growth' sustainable if the economy is not in recession? What happens if naive optimists like Mark are right and things improve as much as they hope?
VangeIV,
Although we probably both believe it to be meaningless, my comments were about the way national productivity is being measured by economists. Mark clearly indicates that national productivity is derived by dividing GDP by the number of employed workers. Using that measure, health care practitioners - physicians and nurses - are extremely productive. Anyone who earns a high salary is considered highly productive - using that definition.
So, my argument is this: increases in GDP due to health care growth and decreases in GDP due to construction decline are not equivalent. And that switch in "mix" of GDP contribution accounts for much of the apparent increase in productivity Mark comments about.
VangeIV: "All that spending but little change in life expectancy. How is that productive?"
Life expectancy is an irrelevant measure of the effectiveness of the U.S. health care industry. The goal of most of that industry is not to increase life expectancy but rather to fix health problems and increase quality of life. You may not agree that should be the goal, but it is the goal nonetheless.
Much of the recent innovation in health care expenditures have nothing to do with increasing life expectancy.
Laparoscopic surgery in general does not increase life expectancy. But laparoscopy does allow the partient to return to a normal life much more quickly.
Brain pacemakers do not increase the life expectancies of epilectics and of those afflicted with Parkinson's. But those devices do ease the discomfort and sufferring of those patients.
Cochlear implants do not increase the life expectancy of the deaf and near-deaf. They simply allow many such persons to hear sounds.
If Americans wished their health care spending to be focused on increasing life expectancy, we could make that choice. Fortunately, IMO, we do not.
So, my argument is this: increases in GDP due to health care growth and decreases in GDP due to construction decline are not equivalent. And that switch in "mix" of GDP contribution accounts for much of the apparent increase in productivity Mark comments about.
I have no argument with that except to note that greater spending on health care without an increase in longevity is not really productive. All I see is increased consumption that is not measured properly in real terms because economists (and people like Mark) do not account for inflation properly.
Life expectancy is an irrelevant measure of the effectiveness of the U.S. health care industry. The goal of most of that industry is not to increase life expectancy but rather to fix health problems and increase quality of life. You may not agree that should be the goal, but it is the goal nonetheless.
Increasing the quality of life sounds great but it is very hard to measure properly. Yes, advances do make a difference for many people but they do so by transferring limited resources from other purposes that could also lead to improving the quality of life. I could help someone live better for the next five years by spending $5 million that would be seen as an increase in GDP. But did the expenditure increase the quality of life of the biggest number of people? Your argument would be perfectly valid if we were dealing with voluntary transactions made with one's own resources in a competitive marketplace but with the exception of eye surgery, cosmetic surgery and a few other sectors, healthcare does not fit as a competitive marketplace where consumers make decisions about spending their own dollars on the best products.
vangeiv: "Increasing the quality of life sounds great but it is very hard to measure properly."
Are you suggesting that the only goals for the health care industry should be those which are easy to measure?
I do not agree with your assertion that quality of life is very hard to measure. I would agree that it is very hard to create an aggregate measure of quality of life.
I do not disagree with some of your arguments about flaws in the U.S. health care industry. All I hoped to do by responding to your comments was to get you to realize that life expectancy is not now, and should not ever be, the goal by which to measure the effectiveness of the health care industry. I am not optimistic that you will accept my argument.
Are you suggesting that the only goals for the health care industry should be those which are easy to measure?
No. I am saying that you are making claims that you cannot support with objective evidence.
I do not agree with your assertion that quality of life is very hard to measure. I would agree that it is very hard to create an aggregate measure of quality of life.
I point out that you have a broken window problem. You see the positive effect on an individual but do not observe the possibly bigger positive effect that the spending could have had if allocated elsewhere.
I do not disagree with some of your arguments about flaws in the U.S. health care industry. All I hoped to do by responding to your comments was to get you to realize that life expectancy is not now, and should not ever be, the goal by which to measure the effectiveness of the health care industry. I am not optimistic that you will accept my argument.
I am not claiming what you attribute to me. I merely point out that you have little data to support your claims of greater quality of life improvements due to more spending. If you look at demographic factors alone you will see that greater spending is necessary just to stay afloat.
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