Small Business Election Countdown: Productivity Improves. Can Growth Be Sustained?

By SBE Council at 4 November, 2016, 9:51 am

Productivity - Golden Compass Needle on a Black Field Pointing.

by Raymond J. Keating-

Imagine a substantive, issues-based presidential campaign in which the candidates actually debate the state of productivity in the U.S. economy. The question is simple: How productivity growth can be improved?

Yeah, well, this economist can dream, right?

In fact, this should be the case, as labor productivity matters given that incomes, ultimately, are tied to productivity. The more productive the individual, the greater their earnings.

How does productivity growth increase? More private investment. That is, for example, investment in new and better machines, processes and tools, technological advancements, and quality education and improved skills.

Therefore, when the U.S. Bureau of Labor Statistics offers the latest measure of business sector labor productivity, it warrants more attention than it often receives. The preliminary take on third quarter productivity was released on November 3. (As noted 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.”)

The good news was that productivity growth spiked up in the third quarter to 3.1 percent. That was after three consecutive quarters of declines: -0.4 percent in the second quarter, -0.7 percent in the first quarter, and -2.5 percent in the fourth quarter of 2015. And as reported, “From the third quarter of 2015 to the third quarter of 2016, productivity was unchanged.” So, while third quarter productivity growth was up, the overall productivity picture is anything but robust.

Indeed, as examined in an SBE Council’s report released in August 2016 – “Gap Analysis #4 – The Productivity Shortfall: Causes and Results” – the story on U.S. productivity in recent years has been quite grim. As noted in the study, “The slowdown in productivity growth in recent years has been dramatic. Consider that from 1956 to 2016 (note: 2016 is the average rate for first two quarters), annual productivity growth averaged 2.0 percent. Before the recent recession and poor recovery, productivity averaged 2.2 percent annually from 1956 to 2006. Since the poor U.S. economy of the late 1970s and very early 1980s, productivity growth showed similar growth rates, that is, averaging 1.9 percent from 1983 to 2016, and 2.3 percent from 1983 to 2006. These rates of growth make clear how poor productivity growth has been in recent years – averaging a mere 1.1 percent from 2007 to 2016, and a woeful 0.4 percent from 2011 to 2016.”

The dramatic step up in productivity growth in the third quarter is most welcome. But as is the case with poor U.S. GDP growth (see SBE Council’s Gap Analysis #1: The GDP Shortfall) over the past several years, there is a quarter here and there where productivity growth jumps up, but there is no sustainability, and the quarters of solid growth turn out to be the exception.

The problem of sustainability for both GDP and productivity growth will only be solved when private investment is reignited (see SBE Council’s analysis on a shortfall in private investment in Gap Analysis #2: A Lost Decade for Private Investment). In order for that to happen, governmental costs, obstacles and uncertainties must be removed through, for example, tax and regulatory relief and reform, as laid out in SBE Council’s most recent report titled Gap Analysis #8: Policy Solutions for Closing the Gaps in Our Economy.

Get the incentives for investment right, and entrepreneurship, small business, productivity, GDP and income growth will flourish. It seems to this economist that that would be worth discussing and debating on the campaign trail.