We are starting to see many signs that the overall economy is beginning to climb out of the recession; for example, the 52.9 reading from the ISM yesterday.
But the one area that has yet to see any real improvement is in the jobs market. Well, if output is starting to go up but the number of people working isn’t, almost by definition you are going to get an increase in productivity. After all, productivity is output/hours worked.
The second swipe at the second quarter productivity numbers showed that productivity increased at a 6.6% rate, up from the initial read of 6.4%. This was the biggest increase in productivity since the third quarter of 2003.
The economy was still in much worse shape in the second quarter than it appears to be now (at least in terms of direction, if not levels). Manufacturing productivity grew 4.9 percent in the second quarter, as output fell 9.8% and hours worked decreased 14.0%. The declines in both output and hours were much steeper for durable goods manufacturers — both consumer oriented like Ford (F) or business-oriented like Paccar (PCAR) — than they were for non-durable manufactures like General Mills (GIS).
The second quarter productivity numbers are a major turnaround from the first quarter, when it increased only 0.3% overall and decreased 2.6% for manufacturing. Then output was falling like a rock, and businesses were scrambling to cut hours as fast as they could. It looks like they more than caught up from April through June.
We got that increase in productivity because in the second quarter output fell by 1.5% (roughly consistent with the 1.0% drop in GDP), while hours worked fell by a stunning 7.6%. If measured on a year-over-year basis, output was down 5.5% and hours worked dropped by 7.2% for a productivity increase of just 1.9%. That is actually a bit below the average rate of 2.5% so far this century. However, we probably have a few more quarters of strong gains in productivity to come. That is what the strong ISM numbers combined with the weaker than expected ADP report are practically shouting at us.
This should be good for corporate profits and is consistent with what we saw with the earnings reports in the second quarter. For company after company, the story was worse-than-expected (and falling) revenues, but somewhat better-than-expected earnings. Companies were able to cost-cut their way, if not to higher earnings (less than a third of S&P 500 firms reported higher earnings than a year ago), then at least to earnings declines that were less than expected (more than three times as many positive surprises than disappointments).
Less than one quarter of all S&P 500 firms reported higher revenues than a year ago. The big reason that they were able to do that was that unit labor costs were lower, falling by 5.9%. On a year-over-year basis, unit labor costs are down by 1.9%. Essentially, this means that all of the benefits to higher productivity are accruing to businesses, and virtually none is going to the workers.
That has been the pattern over the last decade, but was not always the case. From the end of WWII to the end of the century, (and especially until 1980 or so) labor and capital shared more or less equally in the fruits of increased productivity. This meant that the standard of living for the median household rose.
In the early years of this century, we saw great growth in corporate profits, but median household income languish. Having all of the benefits of productivity increases go to capital rather than being shared is one of the reasons that income inequality has been rising so rapidly in this country, and is now the most lopsided it has been since the late 1920’s.
Read the full analyst report on “F”
Read the full analyst report on “PCAR”
Read the full analyst report on “GIS”
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