Waving Hello to Productivity
Submitted by Atlas Indicators Investment Advisors on March 5th, 2018
Atlas has been writing about the tepid nature of the current economic expansion for years. Occasionally, there have been a couple of back-to-back quarters that harken to the trajectories of old (e.g., 2nd & 3rd quarter 2014 and 2nd & 3rd quarters 2017), but on balance America’s output growth has been lackluster, even the final quarter of last year was just downwardly revised last Wednesday.
Most economists believe two broad issues drive America's economic growth: increasing population and/or productivity. When an accelerating number of people are consuming, that drives the economy forward. However, if population growth is slowing (as it has in America since 1990 according to the World Bank), faster productivity is necessary to keep output from decelerating. So what is happening to productivity? Researchers at the McKinsey Global Institute set out to answer the question.
Their findings were somewhat concerning. Labor productivity is near historic lows in America, decelerating since the 1960s. In particular, there was a dramatic drop to a mean of 0.5 percent from 2010-2014 after averaging 2.4 percent a decade earlier. McKinsey’s findings suggest three “waves” have created this deceleration.
Wave one really started to crest around 2005 when a decade-long productivity boom driven by the convergence of a revolution in technology and global supply chain restructuring started to end. Leading up to this point, firms were making large improvements to logistics efficiencies, but when business process transformations reached near saturation, marginal gains slowed.
Our nation’s financial crisis created wave two. With major financial institutions on the rope, uncertainty spread throughout the economy. Lending volume declined as banks dealt with bad loans and weak credit demand. Consumption waned, causing companies’ capacity relative to demand to grow, discouraging further outlays for capital equipment. Ultimately, investment growth slowed to the lowest rate since World War II.
McKinsey believes America is still riding the third one, referring to it as the digitization wave. Many refer to it as the Internet of Things. Its eventual impact on productivity is yet unknown. While it has promised significant enhancement in output per labor hour, these gains are not materializing. Investment in this wave is currently underway. The researchers offer adoption barriers (e.g., online retail is twice as productive as brick and mortar but represents just 10 percent of sales), and lag effects as possible explanations for the lack of positive impact.
As the impact of the financial crisis subsides, America is left waiting for a remedy to its slow growth. Demographic trends seem to require improved productivity to do the heavy lifting. Gains in productivity will need to outweigh the slowing population growth. Have you seen some of the technologies being developed? Watching the current wave crest could be an exciting pastime. Atlas is optimistic, America has been through many waves and has a knack for coming out on top.
