Thursday, November 5, 2009

How Much Longer Can Productivity Be Squeezed?

The Bureau of Labor Statistics (BLS) reported a stunning 9.5% jump of productivity in the third quarter. Productivity , simply put, is output per labor hour. With unemployment rate expected to top 10% soon, workers who still have jobs are beeing squeezed to get the job done. How much longer can companies go without hiring by simply squeezing every bit out of productivity?

Although history does not always repeat in the same manner, it may be fun to do a little bit of pre-weekend economics homework by looking into the past. I looked at the economic downturn in the last 40 years. The economic downturn refers to the peak to trough of the US economy as marked by National Bureau of Economic Research (NBER).

The first date marked the peak of a business cycle while the second date marked the trough (the end of the downturn) and the number in parenthesis marked the quarter.

1. December 1969(IV) --November 1970 (IV)
Productivity peaked 1 quarter after the end of downturn. Unemployment peaked 1 month after the end of downturn.

2.November 1973(IV)-- March 1975 (I)
Productivity peaked 1 quarter after the downturn ended. Unemployment peaked 1 month after the end of the downturn

3. January 1980(I)-- July 1980 (III) 
Productivity peaked 2 quarters after the downturn ended. Unemployment peaked in the very same month the downturn ended.

4. July 1981(III) --November 1982 (IV) 
Productivity peaked 2 quarters after the downturn ended. Unemployment peaked 1 month after the downturn ended

5. July 1990(III)-- March 1991(I)
Productivity peaked 4 quarters after the downturn ended while unemployment 15 months after the downturn ended

6. March 2001(I)-- November 2001 (IV)
Productivity peaked 7 quarter later although there was a significant spike 1 quarter after the downturn ended.Unemployment peaked 17 months after the end of downturn

7. December 2007(IV) --  ???

By a very quick look at these numbers, one may notice a difference between the periods in 1970s,80s and the periods in 1990s,2000s. During downturns in 1970s,1980s, productivity and unemployment peaked soon after the end of the downturn (within a quarter or two for productivity and a month or two for unemployment). In contrast, productivity and unemployment peaked long after the end of downturns was marked in 1990s and 2000s (as long as 5 quarters and/or 17 months).

What contributed to such a long lag between the bottom of the downturn and the peak of productivity and unemployment? A wild guess of mine would be technology and outsourcing. Technology nowadays enables a company to go by just fine without many in-house supporting services such as accounting, human resources, customer services. These tasks can all be outsourced in order to save cost. I suspect this will also be the case for this downturn. Productivity and unemployment rates can stay high long after the trough has been reached.

Ok, now. The next question is: Have we reached the trough yet?

No comments: