FACT OF THE WEEK: Productivity and Investment

By at 8 August, 2014, 1:04 pm

Productivity growth for 2014

According to BLS, productivity growth for the second quarter of 2014 was 2.5 percent, which is an improvement over the average of 1.4 percent spanning the recession and economic recovery.

The health of the U.S. economy comes down to the vitality of private-sector risk taking, that is, entrepreneurship and investment.

The Bureau of Labor Statistics released second quarter productivity data on August 8. Nonfarm business sector labor productivity grew by 2.5 percent. That’s a healthy clip, until it is put in perspective with a decline of 4.5 percent in the first quarter. That first quarter falloff was the largest since the fourth quarter of 1981.

As explained by the BLS, “Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.”

With revisions, productivity growth was downgraded for 2011 and 2012 – now estimated at 0.1 percent and 1.0 percent, respectively – and upgraded a bit for 2013 – to 0.9 percent.

The problem remains productivity growth has averaged a mere 0.7 percent from 2011 to 2013, Productivity growth actually was strong in 2009 and 2010 (3.2 percent and 3.3 percent, respectively), but that was overwhelmingly due to a recession reducing employment and businesses working to gain efficiencies at the same time.

For good measure, the average productivity growth rate for the first two quarters of 2014 was a dismal -1.0 percent.

During the recession and this poor recovery, productivity growth has averaged 1.4 percent.

Putting these numbers in context, annual productivity growth averaged 2.2 percent from 1950 to 2013, and 2.1 percent from 1983 to 2013. So, productivity growth has come up woefully short in recent times.

In contrast, during a good economy, one sees strong private-sector investment, which in turn enhances economic growth, employment and productivity. In addition, income is directly tied to productivity.

It’s not surprising that we’ve experienced poor productivity growth when private investment has been so poor. As noted in other recent SBE Council analyses, real gross private domestic investment in 2013 still had not recovered to the recent high hit back in 2007. Rather, real private investment in 2013 was down by 6 percent compared to 2007. And that ranked as the worst performance since the Great Depression.

The question then is: Why? It’s all about increased costs and uncertainties imposed via public policies on private business and risk taking, including on the tax, regulatory, government spending, trade and monetary fronts.

Raymond J. Keating, Chief Economist

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