Tuesday, August 20, 2013

US productivity and potential growth

The US Bureau of Labor Statistics recently released revised productivity and unit labour cost data on the back of the recent benchmark revisions to GDP.  The end result is a tweak higher in productivity growth over the history of the data. Labour productivity growth has average 2.3% per annum since 1966, slightly higher than the previously published rate of 2.2%.

More recently the data is in line with what we expected to see: weak labour productivity in the December quarter of 2012 and March quarter of 2013 is consistent with the low GDP growth we saw over those quarters.  Productivity growth recovered into the second quarter of the year growing at a seasonally adjusted annual rate of 0.9%, although the annual rate of growth remained at zero for the second consecutive quarter.  Unit labour costs rose 1.4% over the year which is not a level that would trouble the Fed.

 The data also provides insights into the subdued nature of the recovery in the US economy since the Great Recession and, perhaps more importantly, what needs to happen if we are to see a return to a higher potential rate of growth.

Labour productivity has averaged growth of around 1.8% since the start of the recovery in early 2009.  That’s lower than the long-term average and broadly consistent with our view of post-GFC potential US GDP growth of around 2%, lower than the 2.5%-3.0% in the years leading up to the GFC.

If potential growth is to move higher we need to see a move back to higher productivity growth.  I expect we will see some recovery over the remainder of this year as the impact of fiscal drag wanes, growth strengthens and employment growth remains modest.  But for longer term gains in productivity we need to see stronger business investment.  That investment needs to be of the “capital deepening” variety (an increase in capital intensity).  That’s why we have always said a move back to previous rates of potential GDP growth requires solid business investment and why we put particular emphasis on equipment and software investment.

The sustainability element of the equation comes via the fact that higher productivity will assist in keeping unit labour costs in check which will in turn keep inflation subdued.  With productivity expected to move higher and business surveys pointing to higher investment in the period ahead, that supports the case for a very benign US inflation environment for some time yet.