US labour productivity increased by an impressive 3.1%q/q, annualised, during the third quarter of 2016. This is well up from a revised decline of -0.2%q/q in Q2 2016 and a drop of -0.6%q/q in the first quarter of 2016. The Q3 2016 increase in productivity was also well above market expectations, which was for an increase of 2.1%q/q.
The latest increase in productivity reflects the combination of a 3.4%q/q increase in output that was partially offset by a 0.3%q/q rise in the number of hours worked. Importantly, from the third quarter of 2015 to the third quarter of 2016, productivity was unchanged, and a slowed meaningfully in recent years (see discussion below).
Labour productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked.
Compared to 1947, the United States produces 330 percent more goods and services per hour of work. That is a substantial increase, which is ultimately reflected in the many improvements in US living standards since World War II. Stated differently, due to advances in technology, education, management, etc, the average person in the US can do in 15 minutes what their great grandparents needed more than an hour to do in 1947.
However, one of puzzling features of the US economy in recent years has been the overall slowdown in productivity growth. Since the fourth quarter of 2007 (the onset of the financial crisis), US labour productivity has grown by an average of just 1.0% a year. That is less than half the long-term average productivity growth rate of 2.2% since 1947. In fact, US labour productivity growth is lower in the current business cycle than during any of the previous ten business cycles. (See chart attached). Growth in productivity is a crucial component of a vibrant and growing economy. According to Nobel Prize-winning economist Paul Krugman, “Productivity isn’t everything, but in the long-run it’s almost everything.”
The slowdown in US productivity growth may seem surprising, given all the new technologies and products that have been introduced in recent years. However, there is an increasing volume of research suggesting that a lot of the recent innovation in technology is “nice-to-have” but does not really enhance productivity to the extent that earlier advances in technology did. In addition, the lack of growth in US fixed investment activity (reflected in the decline of US durable goods orders) is also holding back the much-needed gains in US productivity.
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