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Tuesday, August 10, 2010

Productivity was about Doing Less.... With Even Less

The WSJ reports:

U.S. productivity unexpectedly fell in the second quarter, the first drop in 18 months, amid slower output growth and an increase in labor costs. Nonfarm business productivity dropped at a 0.9% annual rate in the April to June period, the Labor Department said Tuesday. It was the first decline since the fourth quarter of 2008, when productivity fell by 0.1%.

The strong gains in productivity growth, which ranged from 3% to 8% in 2009, are likely over. Productivity usually picks up sharply at the end of recessions. The recovery has been in place for more than a year now, and the economy slowed in the second quarter compared to the previous two quarters.

The chart below shows it all. The increase in productivity was never due to doing more, with less. It was doing less with (an even larger) less.

The recent drop in productivity is (to me) not a bad sign. It is simply the decrease in marginal returns from bringing workers and capacity back into the system. In other words... the jump in productivity wasn't as great a thing as some thought, while the decline is not as bad as many now think.

Source: BLS