Productivity Growth Still Weak

The economy is growing at a rate of about 3%, which is a significant improvement over the 2% growth during President Obama’s two terms. The unemployment rate has dropped to just 4.1% and even the U-6 rate has dropped from a high of about 17% in 2010 to just 8% today.

Meanwhile, American corporations are reporting their earnings and, “Indisputably, this will be another big quarter for profit growth,” according to Bloomberg. “After President Donald Trump’s tax cuts, the expected gain in S&P 500 income stands at 17% for the January-March period, the fastest in seven years.”

In addition, businesses are investing in growth again. The amount of money businesses invested in their own growth increased 6.3% in 2017, the biggest improvement since 2011. And we’re even seeing more companies go public.

Hard to Predict

And yet, productivity growth remains weak. As we’ve previously written, productivity has suffered for many reasons, including high taxes, heavy regulation and fewer business start-ups.

Will tax reform and deregulation help boost productivity growth again? They should. And they certainly won’t hurt productivity. However, as Jerome Powell, new chair of the Federal Reserve Board, noted recently, productivity growth is “notoriously difficult to predict.”

Bloomberg reported that, “except for a burst associated with the first Internet boom in the 1990s, productivity growth since the late 1970s has been dismal, especially in the wake of the financial crisis. Labor productivity since 2011 — when the labor market stabilized after massive layoffs — has averaged 0.7% annual growth, and total-factor productivity just 0.6%.”

A new report by McKinsey Global Institute identified many reasons for today’s slow productivity growth.

“Two waves have dragged down productivity growth by 1.9% on average across countries since the mid-2000s,” according to McKinsey. “The waning of a boom that began in the 1990s with the first information and communications technology (ICT) revolution, together with a subsequent phase of restructuring and offshoring, reduced productivity growth by about one percentage point. Financial crisis aftereffects, including persistent weak demand and uncertainty, reduced it by another percentage point, as investment was low even when hiring returned.”

The McKinsey report suggests that developed economies can “unlock” their productivity potential by boosting demand and digital diffusion — i.e., broader use of technological innovation.

“To incentivize broad-based change,” the report concludes, “companies need competitive pressure to perform better, a business environment and institutions that enable change and creative destruction, and access to infrastructure and talent.”

In his speech, Powell said the three elements needs to rejuvenate productivity growth are business investment, labor quality and innovation. With business investment increasing, the other elements may fall into place.

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