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Thursday, September 2, 2010

Productivity Down... Is this Finally the Employment Bottom?

Reuters details:

U.S. non-farm productivity fell more steeply than previously estimated in the second quarter, posting its largest decline since the third quarter of 2006, according to government data on Thursday that underscored the sputtering economic recovery.

Productivity contracted at an annual rate of 1.8 percent, the Labor Department said, instead of the previously reported 0.9 percent pace.

Productivity, a measure of hourly output per worker that is taken as an indicator of the economy's vitality or lack of it, increased at a 3.9 percent rate in the first quarter. Markets had expected productivity to drop at a 1.9 percent pace in the April-June period.

This is somewhat misleading. During the crisis when productivity spiked, bulls said this proved the the case for a quick rebound (which also wasn't true). As EconomPic detailed:
The increase in productivity was never due to doing more, with less. It was doing less with (an even larger) less.
And now that productivity is declining? As the chart below shows, it just means that the workforce is doing more, but with even more (i.e. hours worked grew faster than output, hence a decrease in productivity).

A decline in productivity is something inevitable when hours are added (declining marginal productivity per hour) or when workers are added (and less productive initially than existing workers). The goods news is that hours are in fact rising (finally).

Over the longer term we can see just how bad things are. The chart below shows the ten year (annualized) change in hours worked and overall output. While output is up ~17% since 2000, the current level of hours worked is down ~9% (both on a cumulative basis).

The question some are asking based on data similar to the above is... is it possible things can get much worse? Per Bloomberg:

The U.S. economy is so bad that the chance of avoiding a double dip back into recession may actually be pretty good.

The sectors of the economy that traditionally drive it into recession are already so depressed it’s difficult to see them getting a lot worse, said Ethan Harris, head of developed markets economics research at BofA Merrill Lynch Global Research in New York.

Inventories are near record lows in proportion to sales, residential construction is less than half the level of the housing boom and vehicle sales are more than 30 percent below five years ago.

“It doesn’t rule out a recession,” Harris said. “It just makes it less likely than otherwise.”

Source: BLS