U.S.: Another Sign of an Economic Recovery

Stratfor

Summary

The U.S. Labor Department said Aug. 11 that worker productivity increased 6.4 percent in the second quarter of 2009. This is not only the best productivity surge in six years, it is also a sign that the U.S. economy is well on its way to recovery.Analysis

The U.S. Labor Department announced Aug. 11 that worker productivity surged 6.4 percent in the second quarter of 2009 as measured from a quarter earlier at an annualized rate. Aside from the “simple” fact that the figure was the best in six years, it also indicates the American economy is returning to growth.

The U.S. economy is a heavily service-oriented, value-added beast. Americans enjoy a high standard of living, in part because they are also among the highest paid workers in the world. Labor costs are the single biggest expense for most American firms, and labor-related inflation is the biggest contributor to inflation in the United States. Unfortunately for workers, it also means that in times of recession, employers see cutting the number of workers as the fastest means of cutting costs, making their operations more efficient and ultimately staying in business.

But American workers are also very efficient. The widespread application of technology — especially information technology, such as computers and various forms of information management (cellular communications, for example) — allows American workers to produce more per unit of time than nearly any other work force in the world. And U.S. workers’ efficiency has been increasing far faster than most of their competitors’ efficiency for years.

Within the American economy, the race is between worker productivity and labor costs. If productivity can stay ahead of labor costs, odds are that inflation will be tame and gross domestic product (GDP) growth will accelerate. But should labor costs creep ahead of productivity growth, the opposite happens and recessions typically occur. During recessions, firms shed workers and find ways to improve productivity and lower costs, leading to a recovery.

According to the Labor Department data, it appears that the current recession did not break this cost/productivity rule.
Chart - US Econ Indicators

In 2008 labor costs shot well ahead of both GDP growth and worker productivity growth. A harsh recession ensued (in part) because the economy could not support the relatively inefficient yet costly workers. During the recession employers forced new efficiencies into their operations (economists’ code for “fired people”) and now worker productivity is far above both GDP and labor costs.

The cost/productivity factor is obviously not the sole or proximate cause of the 2008-2009 recession; that honor lies with subprime realty and the banking crisis, factors that have already run their course. But in an economy that is 90 percent services, shifts in the labor market are every bit as critical as finance in determining the road down, and in time, the road out. As far as the labor market is concerned, the factors which encouraged the recession have inverted. And with the fundamentals of American growth back in place, it should only be a matter of time, and not much of it, before the economy starts growing again.

That does not mean that it will feel like a recovery to the average worker. Employers’ slimming of payrolls to achieve efficiency has pushed American unemployment to its highest levels in nearly a generation. And while that may be good for the economy in the short run, the unemployment rate will not ease until later.