- Market Commentary
- By Jack Ablin
- August 23, 2018
Productivity, the increase in output per hour of work, is probably one of the most vital economic indicators we track. Higher productivity means workers can get more done with no incremental effort. Over time, productivity gains enable an economy to improve its living standard without inflation. Thanks to productivity Americans no longer travel by horse and buggy, tiptoe outdoors to the bathroom or must travel to stores to buy things.
Combined with labor force growth, productivity determines an economy’s potential growth rate: how fast it can expand without incurring shortages of labor or manufacturing capacity. That’s why last quarter’s productivity reading was welcome news. According to the Bureau of Labor Statistics, US worker productivity expanded at an annualized rate of 2.9 per cent in Q2/18 – its strongest quarterly reading since Q1/15 and more than double its current run rate.
Over the last several decades productivity has been in decline, which helps explain America’s tepid economic growth despite double-barreled monetary and fiscal stimulus. Productivity expanded at an average annual rate of 2 per cent during the 1970s, 1980s and 1990s, with the entrance of more women into the workforce, the introduction of the personal computer and the advent of the Internet. However, since 2000 annual productivity gains have tapered off to 1.5 per cent on average. And over the 10 years through 2017 productivity grew at just 1.1 per cent – its slowest rate in US history.
Try as they might, governments can’t simply mandate higher productivity. They can, however, create fertile ground for innovation to flourish by providing entrepreneurs with access to high-quality labor, cheap capital and little red tape. While employers bemoan the shortage of qualified candidates, many of productivity’s key ingredients are currently in place. Business investment has accelerated over the last 18 months, some of which could be credited to the recent corporate tax incentives. While 2.9 per cent doesn’t make a trend, we view it as an optimistic sign that a boost in America’s potential growth rate and improved living standards lie ahead.