November 6, 2019

Non-farm productivity edged lower in the third quarter by 0.3% after solid gains of 2.5% in the second quarter and 3.5% in the first quarter.   During the course of the past year productivity has risen 1.4%.  The 0.3% decline in the second quarter consists of a 2.1% increase in output combined with a 2.4% increase in hours worked.   But what is noteworthy is that productivity growth is still climbing at a respectable pace at the 10-year mark in the expansion.  That is unusual and we believe that the tight labor market is causing firms to spend money on technology.  By doing so they can increase output without increasing their headcount which means that productivity growth climbs.

From 2000- 2010 nonfarm productivity averaged 2.7%.   From 2010 to mid-2016 productivity growth slowed to about 1.0%.  But productivity growth has begun to accelerate.  In the  past three years it has risen 1.4%, and in the past year it has also risen 1.4%.

One of the reasons that productivity is not growing faster is that retiring baby boomers are leaving both their jobs and the labor force, and taking some of their knowledge with them which is adversely impacting the growth rate for productivity.

The basic problem however, in our view, was that for several years businesses were reluctant to invest despite a record stockpile of cash, near record low interest rates, and a booming stock market because they were bothered by uncertainty about future tax rates, the inability to repatriate overseas earnings to the United States, the rising cost of health care which firms with more than 50 employees had to provide,  and an avalanche of onerous, confusing, and sometimes conflicting regulations.

We previously expected productivity growth to climb to 2.0% by the end of the decade  However, Trump’s trade policy and his constant, inconsistent tweeting are making business leaders nervous.  As a result, business confidence is declining.  If so there will be less investment spending and, presumably, less rapid growth in productivity.  We do not want to get too negative but we have to recognize this development.  Thus, we have trimmed our projected productivity growth rate from 2.0% going forward to 1.7%.  If it sustains a 1.7% pace, the economic speed limit will climb from 1.8% a couple of years ago to 2.5% within a couple of years.  The standard of living will grow 0.7% more quickly.  It will also help keep inflation in check by offsetting some of the increase in wages.

Stephen Slifer


Charleston, SC