Labor Productivity: Not a Pretty Picture

Earlier today the BLS posted the most recent quarterly reading for ‘Labor Productivity.’   The numbers were not good.

What is productivity and why is it important?

Why You Should Care:  If you work for someone (or something), at the minimum your potential future salary increases are most likely reliant on two things:

• First, that entity’s improving performance and your role in producing those results.
• Second, macro economic factors such as CPI increases and productivity gains.

While I can’t comment on the former, I can on the latter.   But I don’t have good news for you:   Both are very low (by historic standards) … and continue to trend lower.

If you’re an investor, you want growing corporate profits to lift the DJIA.  Unfortunately, I don’t have good news for you either.   Negative productivity is a drag on earnings.  If this trend continues, over a longer term, this could spell doom and gloom for the US stock markets.   We will continue to watch corporate profits very closely.

Taking Action:  It’s probably too early to ring the bell … and suggest you run for the hills – from an investment perspective, that is.  Keep your stock positions open.  But let’s watch these trends very carefully.

The BLOG:  The BLS defines ‘Labor Productivity’ for us:

“Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.

The measure describes the relationship between real output and the labor time involved in its production.   Measures of labor productivity growth show the changes from period to period in the amount of goods and services produced per hour worked. They reflect the joint effects of many influences, including changes in technology; capital investment; level of output; utilization of capacity, energy, and materials; the organization of production; managerial skill; and the characteristics and effort of the work force.”

So, at a high level, each calendar quarter this metric tracks changes in the amount of ‘stuff’ (economic output) created in one hour.   Over time, improvements in technology and growth of capital investment are supposed to increase productivity.

But for the last nine months, this has not been the case.

We have now seen three (3) consecutive quarters of negative productivity growth.   The last time this happened was … well, a long time ago.   The BLS has been tracking productivity since 1947.   The last time we saw 3 consecutive quarters of declines was in 1993.   Before that, 1955.  Before that, never.    (1979 was a particularly bad year; productivity declined for three of the four quarters and was zero in the fourth.   Not one reading was positive.)

Even more concerning to me is the long term trend line.   Take a look at the graph below:

The data period is 2006 thru today.   Almost 11 years.  The blue line shows the quarter-by-quarter Productivity number.   The red line is the trend line.   I’ve extended the trend out for 4 quarters – one year.  As you can see, this trend is heading toward zero.

A decline in productivity results in increased production cost.   Which, if not offset by price increases, results in declining corporate profitability.

Per the BEA, the first quarter of 2016 had a positive increase in corporate profitability:  We saw a $34.7 billion increase.  Good.  Unfortunately, this followed a 2015:Q4 decline of $159.6 billion.  Not good.

Here’s a chart from TradingEconomics.com…I’ve added the red trendline:

Declining corporate profits can result from many things.   But at its foundation, it is the result of increased corporate cost without a corresponding increase in prices charged.

Costs up…prices flat.   Hmmm…once again, this economy of ours is not showing any signs of meaningful improvement.

• Terry Liebman