Friday, August 12, 2016

Productivity Continues to Slip

Back in June, I pointed out a problem to keep an eye on in the economatrix; that US productivity, defined as the amount of GDP produced per hour worked, declined two straight quarters.  The new numbers are out, and productivity continued its decline, down another 0.5 %.  That's slightly better than the 0.6% decline in the previous quarter, but dramatically missing the projected 0.5% increase in productivity that the "experts" predicted.  The US clearly has a productivity problem.
It was the third consecutive quarter of falling productivity, the longest streak since 1979. On a year-on-year basis, the productivity fell 0.4 percent, the first annual decline since the second quarter of 2013.
1979 was, of course, Jimmy Carter's term, a period when terms like malaise, stagflation (a mix of  price inflation, high unemployment, with low or no growth) and the misery index were being talked about.  Perhaps not coincidentally, the labor force participation rate stubbornly stays under 63%, 62.8% according to the July jobs report, the lowest the labor participation rate has been since those Jimmy Carter years.
Continuing growth in productivity is important and this decline for three straight quarters is a concern.  As I pointed out in June, as the proponents of the Information Theory of Money say, all our lives we've been told "time is money" but that's backwards: money is time.  Time is strictly limited, the most valuable "possession" each of us ever has is our time here.  The only way to build more wealth is to get more done in less time.  Echoing a quote from Bill Bonner:
The thing that separates rich societies from poor societies is productivity. It measures how much output you can get from each unit of input – mainly labor and capital.

In the richer societies, a workman’s time is more valuable because he can produce more from each hour of labor. Since time is limited, the only hope of making material progress is to increase productivity.
Underscoring the importance of this number, Fed Head Janet Yellen said it was one of her major concerns.  Yet more evidence the economy will never return to normal as long as the Fed keeps jacking the money supply around; there's always a reason not to let things recover.   
Federal Reserve Chair Janet Yellen said in June that the outlook for productivity growth was a key uncertainty for the U.S. economy and a key determinant of improvements in living standards.
The reasons being cited for the three successive quarter decline in productivity varied largely with whether or not the comments came from someone who is more or less an apologist for the status quo, like Jim Paulsen who says that everything is really fine, it's just that the way we're measuring it isn't right anymore ... suddenly... inexplicably... although it worked until a few months ago.  Peter Schiff, a  well-known "real money" guy thinks the reason is Janet Yellen and the rest of the central bankers.
Ultra low interest rates have encouraged businesses to borrow money to spend on share buybacks, debt refinancing, and dividends. They have also encouraged financial speculation in the stock market, the bond market, and in real estate. Investors may believe that central bankers will not allow any of those markets to fall as such declines could tip the already teetering global economies into recession. The Fed, the Bank of England, the Bank of Japan, and the European Central Bank have already telegraphed that they will be the lenders and buyers of last resort. These commitments have turned many investments into “no lose” propositions. Why take a chance on R&D when you can buy a risk free bond?
Anyone who has read just about anything I've ever written with the "economics" tag will know I'm no fan of the fake money regime the central banks force us to live under, but I'm going to ignore them today.  I want to suggest something I don't see being talked about as an issue: regulation - another of my hot buttons.   Your friendly Fed.Gov minions at report that they've issued 6,180 regulations in the last 90 days.  Since I started watching that site in 2012, they've issued over 6000 new regulations every 90 days.  A little arithmetic shows that if they've been doing that since 2009, when Obama took office, 2761 days ago, at least 180,000 new regulations have been issued.  Not all of them will affect every business' productivity.  Some of them are low impact, affecting only very specific things.  No agency ever really considers the regulatory burden they impose on businesses; these are real costs.  Some of them end up taking real employees time away from their jobs, which automatically damages productivity. 
Utah senator Mike Lee posted this photo in 2013 which depicts the laws that the Senate passed and the president signed, it's the small stack of papers on top of the cabinet, along with the 80,000 pages of new rules and regulations passed by unelected bureaucrats - the stuff tracks. 

If we're looking to figure out what's reducing productivity; what's gumming up the metaphorical gears of American industry, might I suggest we start looking here?


  1. Gee....I wonder what the participation rate started to drop around the end of 2008.

    Anybody here know?

    **/snark off/**

  2. I tell the leftist kooks here in LA that government do not create any jobs, it can only block companies from creating jobs or get out of the way...
    We are about 6 months into the worse downturn since 1929 from what I see in my business (selling equipment). The company I work for builds multimillion dollar equipment for the petrochemical industry. New equipment sales is less than 30% of normal. We compete against the largest companies in the world (price leaders) and they are selling at 45% discounts (well below break even) seemingly due to a promise to their European governments not to lay off people (my company does not have European manufacturing, so we are laying off workers instead of chasing them down the hole).
    Besides the laws and subsidize markerts that distort markets creating malinvestment, I believe the 10+ years of suppressed interest rates has pulled in so much future build into the present we have created years of overbuild and consumers bought much stuff they don't need. Never before has this happened: Worldwide QE and and savings suppression.
    The escape from the 2008 market cleansing of malinvestment which governments didn't let happen is many levels of hell above us in this immense hole that the QE dug.
    Like the Weinmar government that kept printing Marks in 1921 looking for an escape they knew they couldn't find, so are worldwide governments now Q-easing with printing money, lowering interest rates, and throwing out helicopter money. Economist looking at credit growth should see the hyperinflation there...
    I've heard that the derivatives markets are twice as large as they were before 2008... What do you see?

    1. I think you're exactly right about the effects of the QE. The central banks act like they control every single person in the world by cranking the interest rate knob, but interest rates are a vital piece of information that has profound effects on an economy.

      When interest rates are negative in real terms (less than inflation), like they've been since at least '08, it encourages spending money on things that might crank the stock price and bonuses for the Board of Directors, but that does nothing for the business. Companies buy back stock so they can resell it at a higher price. If they don't just pay themselves bonuses with it, they sit on wads of cash as a safety against hostile takeovers. When rates are more realistic, investors are more careful. Right now, stocks are so overpriced when compared to the historic averages that the prices could drop 50% and some of the market would still be overpriced.

      The way the central banks look at it, if they lower rates enough, everyone will just buy, but as you say, all that buying anything now can do is to pull demand in from the future, guaranteeing the future will get worse. At some point, homeowners can't borrow more to buy regardless of the interest rate because (1) they don't have any place to house what they bought and (2) they can't afford to make payments. They have to pay the debt down.

      The thing about the derivatives market being twice as big as in 2008, more than the world's GDP, or more than a quadrillion dollars (thousand trillion), and you'll see all of these, is that these are "notional values" - just the face value on the contract, but that they all tend to have escape clauses in them (I'm sure that's not the term they use!) that lower the value in extenuating circumstances. I think that, at some point, they're worth what someone will pay for them. Just like any other traded item. Eventually, they're worth the price of any other piece of paper.