May 5, 2022

Non-farm productivity plunged by 7.5% in the first quarter after having jumped 6.3% in the fourth quarter.  The quarterly data have been extremely volatile since the beginning of the recession in March and April 2020.   The fourth quarter  increase consisted of a 2.4% decline in output combined with a 5.5% increase in hours worked. Hence, a 7.5% decline in productivity in that quarter.  In the past 10 years productivity has grown by 1.0%.  Since the fourth quarter of 2019 — prior to the recession — productivity has risen at a 1.3% pace,

It appears that in the first quarter firms were able to find at least some of the workers they needed, but supply shortages prevented them from producing as many goods as they would have liked.

We have long believed that technology will boost productivity growth in the longer haul.  Firms need to invest in technology because of an inability to get the number of bodies that they require.

If because of technological advancements productivity can rise by, say, 2.0% annually, then potential GDP growth (our economic speed limit) has picked up from 1.8% a few years ago to perhaps  2.3% (consisting of 0.3% growth in the labor force plus 2.0% growth in productivity.  That is an important concept because the potential growth rate is a proxy for the growth rate in our standard of living.  The difference between 2.3% growth in our standard of living and 1.8% is huge  — a 33% faster rate of growth rate in our standard of living.  We will see how this develops, but it is an important piece to consider.

Stephen Slifer


Charleston, SC