A Key to Escaping the Recession

Productivity growth is one of the keys to escaping a recession.

As you can see from the chart below, it is usually only in the first year of recovery that year-over-year labor productivity growth breaks through 4%, as it just did in Q3. When combined with hourly labor compensation growth now screwed all the way down to a 0.5% pace, falling unit labor costs are the result.

Business Sector Output

Unquestionably, labor productivity gains are one key driver of long-term growth. But here is the hitch we see developing: Small businesses appear to be on the ropes. Large businesses have cut to the bone. Both GDP and S&P 500 profit results indicate companies that are achieving high labor productivity and lower unit labor costs have, so far, been able to hold onto these gains through higher profit margins. However, if U.S. firms do not step up the reinvestment of these profits into the real economy, by lifting production up enough to first end the inventory contraction and begin inventory rebuilding, and then also stepping up their reinvestment of profits in more efficient technology or new products, then the nascent U.S. recovery will sputter out…

To put it in the extreme, labor productivity gains will not get us very far if the profits generated from them do not start getting ploughed back into voluntary inventory rebuilding and reinvestment in capital equipment.

The Daily Reckoning