Thursday, November 02, 2006

Is the Great Productivity Boom Over?

This morning the BLS released its estimates of third quarter productivity growth and labor costs. From the news release:
Productivity in the nonfarm business sector remained unchanged during the third quarter of 2006. Output grew at a 1.6 percent annual rate. Hours of all persons in the nonfarm business sector also increased 1.6 percent, reflecting 0.8-percent gains in both employment and average weekly hours at work. In the second quarter, nonfarm business productivity increased 1.2 percent, as output grew 2.7 percent and hours worked rose by 1.5 percent.

Hourly compensation increased at a 3.7 percent annual rate in the third quarter of 2006. When the rise in consumer prices is taken into account, real hourly compensation rose 0.7 percent during the July-September period. During the second quarter of 2006, real hourly compensation had increased 1.6 percent.
So, does this mean that the great productivity boom of that past several years is over? It's sure beginning to look that way. Take a look at this picture, which shows the 24-month change in productivity in the nonfarm business sector since 1995.

After years of average productivity growth in the range of 2.5% - 3.5% per year, productivity growth has clearly been trending down since late 2004, and over the past two years productivity has grown at an annual rate of just under 2%.

Part of this slowdown in productivity growth surely has something to do with the US now being in the late stages of this business cycle; productivity typically rises most in the early stages of an economic expansion, and rises least in the expansion's late stages. But since we didn't follow that pattern during the last recession (productivity kept booming as the economy slowed down in 2000 and 2001), it gets more difficult to write off the current slowdown in productivity growth as simply a matter of being at the wrong place in the business cycle.

One last note: the compensation that workers are receiving for their production has still not caught up from the substantial divergence that we saw from 2001-05, as the picture below illustrates.

The huge productivity gains enjoyed by the US economy from 2001-05 went almost entirely to the owners of corporations, not to workers. That was very unusual, by the way; normally real compensation tracks productivity quite closely (for a picture of what I'm talking about see this old post from Angry Bear). But for some reason, that relationship broke down during the first five years of this decade. Recent gains in compensation mean that the gap between worker productivity and compensation is at least not getting any larger; however, it's not really getting much smaller either.

That may be yet another reason for average Americans to feel that the current economic expansion has left something to be desired.

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