Productivity, profits and promises

Every quarter economists and investors wait anxiously for America’s Bureau of Labour Statistics (BLS) to announce its latest figures on productivity. Economists care because productivity gains are linked to rising standards of living; investors care because those living standards translate into higher consumption, profits and share prices.

Will America’s “new economy” survive the downturn?

In judging an economy’s prospects, what is the most important measure? Growth in GDP? Inflation? The size of the budget surplus? The level of the stock market? None of the above. Far more important is growth in productivity, which is crucial in itself and which affects all of those things and more. The surge in productivity has been a key element in America’s virtuous economic circle. Faster growth in productivity allowed faster growth in GDP with low inflation. This, in turn, boosted profits and share prices and encouraged more investment, which further lifted productivity. Whether or not firms can sustain their faster productivity gains is, therefore, a far more important question than when the Fed will next cut interest rates.

New figures this week showed that growth in America’s labour productivity slowed to an annualized 2.4% in the fourth quarter of last year (the year-on-year increase slowed to 3.4%, from 5.3% in the second quarter) This implies an acceleration in unit labour costs, which are now rising at an annual rate of more than 4%, up from zero six months ago. This will dent profits and might yet limit the Fed’s room to cut interest rates. But what do the new figures say about the long-term rate of productivity growth? Productivity growth surged to an annual average of 3% in 1996-2000, compared with 1.4% in 1973-95, but economists remain divided about whether this can last. The leading skeptic, Robert Gordon, an economist at Northwestern University, has argued that most of the increase in productivity growth outside information-technology industries has been cyclical, the result of the economic boom. In contrast, the administration’s last “Economic Report of the President” claimed that virtually all of the increase since 1995 has been structural.

Optimists accept that productivity growth will temporarily dip in a downturn, but they expect the trend of rapid growth to persist. Sceptics expect productivity growth to slump. One quarter’s figures cannot settle the matter. The increase in productivity in the fourth quarter was stronger than expected, given that growth in GDP slowed so sharply.

Teaching a new economy old tricks

How productivity holds up will depend partly on how firms adjust investment and jobs to a slowdown. In the “new economy, firms are supposed to behave differently. For instance, it used to be argued that IT investment would be relatively immune to the cycle. In fact, firms are already cutting their spending plans. Total business investment fell in the fourth quarter for the first time in nine years.

Companies, equipped with fancy computer systems and instant information, were also supposed to be able to avoid an excessive build-up in inventories. Yet, as sales have slowed, stocks have continued to grow rapidly. Computerised systems have allowed firms to reduce their stocks, but have not eliminated big swings. Stocks have risen sharply over the past year, by more than at any time since the recession of the early 1990s, making cuts in production inevitable. In the past, firms have also been slow to shed workers during the early stages of a downturn, causing productivity to slump. In the new, more flexible economy, it is argued, firms can cut labour more swiftly. So far, firms have mainly trimmed working hours, not jobs. The snag is that this fails to cut fixed costs.

With profits already falling, firms will be forced to cut inventories, investment plans and workers. Optimists still maintain that IT and more timely information will help firms to adjust swiftly and so help to smooth the cycle. But the paradox is that the more swiftly they do this in a bid to improve their individual performance, the deeper will be the drop in output and profits in the economy as a whole.

That many “new economy” claims look flawed does not necessarily mean that all are. There is evidence that structural productivity growth has quickened, but not as much as is widely believed. Those who think that productivity growth of 3% or more is sustainable are saying that IT will have a bigger economic impact than the era of electricity and cars in the 1920s. That was, and remains, a bold claim.

The Economist

Notes

1. Bureau of Labour Statistics (BLS) – Бюро трудовой статистики: агентство Департамента труда США, которое обрабатывает и распространяет статистические материалы по вопросам занятости, о профсоюзах, уровне жизни, производительности и т.п.

2. the Fed (the Federal Reserve System, the FRS) –Федеральная резервная система (ФРС, центральный банк США), состоящая из 12 региональных банков

1. annualized– в пересчете на годовой основе (для незавершенного периода года)
2. given the growth in GDP slowed so sharply… - see the Krasnov file, §18
3. …does cast some doubt… - see Krasnov §20
4. current-account deficit – дефицит платежного баланса по текущим операциям
5. With profits already falling, firms will be forced to cut inventories - see Krasnov §14

Vocabulary

budget surplus – профицит бюджета

stock market – фондовый рынок

acceleration= growth – ускорение роста; to accelerate – ускорять темпы роста, ant. deceleration

the surge (growth, increase) in productivity – резкий рост производительности; to to lift productivity – повысить производительность; to sustain productivity gain - сохранить, удержать (на достигнутом уровне) рост производительности

to dip = to lower – падать, опускаться, понижаться; dip in smth – снижение ч-л.

to invest – инвестировать, вкладывать деньги или капитал; investment– инвестиция, капиталовложение,помещение капитала (денег), инвестирование; investor – инвестор, вкладчик; institutional investor – институциональный инвестор;to encourage investment – стимулировать капиталовложения

to cost – стоить, обходиться; cost– стоимость;costs издержки; unit labor costs – издержки на оплату труда в пересчете на единицу продукции; fixed costs – постоянные издержки (расходы предприятия на выплату процентов, аренды, страхование, зарплату старших менеджеров); production costs – производственные издержки

to cut labor (workers) – сократить рабочую силу (количество рабочих); to trim working hours (jobs) – сократить количество рабочих часов (рабочих мест)

to reduce stocks – сократить запасы продукции

to shed workers – сократить количество занятых

to argue –аргументировать, приводить доводы в пользу (to argue for ) или против (to argue against). Фраза “he argues that…” переводится “он считает, что…”, “он убежден, что…” ; it used to be argued – считалось, что