Thursday, February 7, 2013

Lower productivity points to slower growth and higher inflation

Today we learned that productivity fell at a 2% annual rate in the fourth quarter of last year. From a peak of 5.6% in 2009, it is now up only 0.6% in the past year. This fits with the slowdown in growth in the past two years—companies have squeezed about as much out of existing resources as they can. Without a faster pace of hiring and more investment in productivity-enhancing equipment, technology, and training, the economy's growth is going to be constrained to the current growth rate in jobs plus productivity gains of maybe 1% a year, and that in turn suggests we could see only 2-2.5% annual real growth going forward.

The above chart compares the 2-yr annualized growth of productivity (to minimize the typical quarterly volatility of this series) to the year over year change in the GDP deflator, the broadest measure of inflation. There is a relative strong tendency for the two to be inversely correlated. Strong productivity tends to coincide with low inflation, and weak productivity gains with higher inflation. If the bloom is indeed off the productivity rose for the time being, then this chart suggests that we could see somewhat higher inflation in coming years. 

Looked at another way, the decline in productivity means that unit labor costs are rising and could now begin to feed through to higher prices.


Chris McFarland said...

I always enjoy your posts. Do the lower productivity numbers change your opinion on the sustainability of record corporate profit margins? I ask because those high profits are the main reason I have a hard time being bullish on stocks. Reversion to the mean still looms large as a possibility.

McKibbinUSA said...
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Benjamin Cole said...

Still, the long-term secular trend on unit labor costs is down, and hitting zoo about now.

Again, I am astonished that serious people are talking about inflation, and not Japanification.

The risk now is that we enter a permanent zero bound, also known as ZLB. Very low inflation, or mild deflation, and low growth. In fact, that describes where we are now.

Six of out the last eight CPI reports have been negative. Where are the deflation hysterics?

What has to happen to inflation before it looses its grip on the psyche of some many economists?

William said...


The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 130.2 in the week ended Feb 1 from 129.6 the previous week.

The index's annualized growth rate climbed to 8.9 percent from 8.2 percent a week earlier - a fresh high of more than 2-1/2-years. It was the highest level since May 2010.

William said...


Bullish 42.8%
down 5.3
Neutral 27.7%
up 0
Bearish 29.6%
up 5.3

Long-Term Average:
Bullish: 39.0%
Neutral: 30.5%
Bearish: 30.5%