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 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.