A peculiar phenomenon has set in.
This cannot be good for jobs: In the second quarter, nonfarm business sector labor productivity – defined as output per hour worked – fell by an annual rate of 0.5% from the first quarter, the Bureau of Labor Statistics reported today. The third quarterly decline in a row.
The last time it dropped for three quarters in a row was from Q3 1973 through Q3 1974 (5 quarters). Alas, in November 1973, the economy entered a recession. Several quarters in a row of declining productivity is not kind to the economy.
The productivity decline in the second quarter this year was the result of output edging up at a seasonally adjusted annual rate of 1.2% while hours worked to obtain this output rose 1.8%. Year-over-year, productivity fell 0.4%.
Here is what this looks like on a quarterly (blue columns) and year-over-year (red line) basis (chart via BLS):
At the same time, unit labor cost rose 2.0% in the second quarter, the result of a 1.5% increase in hourly compensation and the 0.5% decline in productivity. Year-over-year, unit labor costs increased by 2.1%.
Ideally, compensation rises to give workers more spending money, and productivity rises as much or more, so that workers and employers both come out ahead. But that’s not happening.
So what’s wrong? Why is productivity growth so miserably low? And it’s not because Americans somehow forgot to work. Krishen Rangasamy, Senior Economist at Economics and Strategy, National Bank of Canada, put it this way:
Borrowing by corporations for the purposes of stock buybacks instead of investment in machinery and equipment does little to enhance an economy’s capacity for growth. We’re getting more evidence of that in the US where the average age of fixed assets is the highest in half a century and productivity growth is the weakest on records.
Given the productivity declines in the first half of the year, and even assuming productivity grows in the second semester at the fastest pace in six years, productivity growth in 2016 is set to be close to zero. As today’s Hot Chart shows, that would mean a six-year average of roughly 0.5% for productivity growth, the lowest ever recorded. That cannot be bullish for the US labor market.
In Rangasamy’s annual chart below, the red line that has been in decline since 2003 represents the 6-year average productivity growth. Even if his best-case forecast of 2.2% productivity growth in the second half plays out, productivity growth for the whole year will drop to near zero, and the 6-year average would hit 0.5%, “the lowest ever recorded” (click to enlarge):
It will eventually impact the labor market. Here’s why: despite the hiring that companies have been doing, sales – the ultimate measure of “output” – have been heading south since mid-2014.
Total business sales, according to Census Bureau data, which include sales within the US by all companies, not just the largest in the S&P 500, peaked in July 2014 at $1.35 trillion. By May this year, the most recent data available, they’d dropped 4.4% to $1.29 trillion.
Despite sales cascading lower for a year-and-a-half, nonfarm employment from June 2014 through July 2016 has risen by 5.6 million jobs! And that’s what the productivity decline is also showing: the additional labor hours have been accompanied by a decline in sales!
The chart shows how jobs and total business sales are normally on the same wave length: When sales get hit, businesses cut their payrolls; when sales pick up, businesses hire. But since June 2014, a peculiar phenomenon has set in, with employment (blue line, left scale) rising and sales (red line, right scale) falling:
Note that the Census Bureau once again adjusted its numbers for total business sales – downward as always. Since I’m a stickler for numbers, and for pointing out rose-tinted data-set bias, I have added the old numbers (brown line) to the revised numbers (red line).
Some economists contend that the measurement of productivity itself is off because it just can’t be this bad! They contend that the government is doing a lousy job measuring productivity in the modern gig-and-social-media economy. That may be true. But the relationship between declining sales and rising employment points at a core problem: productivity is down – and is down sharply – or else, rising employment would lead to rising sales.
Clearly, something is amiss. Sales and productivity cannot decline forever while companies continue to hire. Eventually companies are going to react in large numbers. They’re either going to perform miracles and get their sales to jump through hoops, or if that fails, they’re going to bring their workforce in line with their lower sales. And that would be when the jobs recovery, as miserable as it has been, gets crushed.
In fact, on an individual basis, on a per-capita basis, the employment situation has barely improved since the Great Recession. Read… Why this Job Market is Still Terrible: The Politically Incorrect Numbers Everyone is Hushing up
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
“Eventually companies are going to react in large numbers. They’re either going to perform miracles and get their sales to jump through hoops, or if that fails, they’re going to bring their workforce in line with their lower sales.”
Yep go figure on this Teflon market which goes up in bad news like decline in productivity or made-up good news on unemployment thanks to BLS manipulation. Market is drunk on ZIRP and at all time high but signals to Janet that it cannot stomach the 0.25% increase.
Anyway something has to give as Wolf outlined and RIF is easy way for the CEOs to make the numbers at the expense of the working class families which may be forced join the ranks of record high on food stamps.
The jobs recovery is a fantasy. The jobs created in the 21st century have been low wage, no benefit. Most young people live with their parents into their 30s. We don’t make things anymore. Such ruination set in 25-30 years ago.
Now the stock buy backs are fizzling. Yeah, companies will “bring their workforces in line with their lower sales.” It could be like 4th Q of 08.
I agree. The increased employment may just be part-time workers. Also, more people are working two part-time jobs. Do you think they get counted twice? Lose one full-time, but gain two part-time, for companies to avoid health insurance? The whole economy is a bag of tricks, an illusion, or delusion. The companies and the banks fully expect to be bailed out somehow by the Feds, and probably will. Political campaign contributors don’t give for nothing in return. The rest of us will pay for it. It’s the ugly truth and sucks. We will have the same excuses as 2008…the world will collapse! So they will manipulate again and again until they can’t do anything about it any more. Then we will really see ugly.
I will offer a different line of reasoning, although in line with what Wolf has been saying. The interest rates have been just about zero, adjusted for inflation, going on half a decade now. When capital has no cost to it every boondoggle of an idea that the CEO has gets approved by the board. The cost of money means any investment has to make enough return in order to pay for itself, for some time now there has been no such pressure. Buyouts, stock buybacks and other nonproductive “investments” have come to dominate the economy. Is it any wonder that productivity is dropping?
The central banks just don’t want to admit that the medicine they have prescribed is killing the patient. The economy is slowly cannibalizing itself.
Bingo. The Fed has driven the time value of money to zero. This means the money value of time is also zero. The Fed has artificially driven interest rates to such a low level that there is no longer any INCENTIVE to make investments. Why take the risk of building something real when you can simply buy the “protected” asset – your own stock. Potential returns need to be meaningfully HIGHER before business will invest. The Fed is now the CAUSE of the deflation all around us.
Essentially, it’s masturbatory but symbiotic. The economy thrives by establishing a symbiotic, cannibalistic relationship with itself.
Its also taking the form of questionable acquisitions such as Linked In and Solar City. These are the last desperate acts. Acquisitions also mean layoffs under the guise of integration and redundancy. Coming soon.
Wonder how the wide spread introduction of the smart phone improves labor productivity – defined as output per hour worked? While traveling I see way too many people are texting while driving.
At some point, the spy-phone coupled with the pestilence of social media has to start decreasing productivity. Dh worked with two people who were playing on their phones most of the day, i kid you not.
Maybe, too, if the Census/BLS factored herion sales into the total business sales figure it would bump the GDP up some. I mean, that stuff isn’t free, right? And there is a herion epidemic in how many states now? You can’t buy cheap Chinese made retail items when your money is tied up in a drug habit.
If you’re right, we should see a plunge in productivity in July and August when Pokemon Go took over people’s minds.
There is a link between productivity and corporate profitability.
Profitability is the key. When it falls firms go on investment strike, that is, capital expenditure (capx) falls accordingly. When capx falls productivity suffers. This is part of the cycle and explains why companies engage in M&A and speculation in financial markets rather than invest in equipment, structures, etc.
Wolf, besides your excellent point that the lack of r&d/capex will depress productivity, so will the foreva lying about the employment stat. The denominator is too high.
But since June 2014, a peculiar phenomenon has set in, with employment rising and sales falling:>>>
Since the BLS does not distinguish between full and part time work, also it does not distinguish between low paying and good paying jobs, the additional labor hours may be attributable to the rise in part time and minimum/low wage jobs only possible in a retail/service industry that is foundering due to the high cost of housing, food, and Obamacare.
The underlying premise behind the chart is that the payroll figures are accurate, but are they? We already have seen some highly questionable numbers coming out of the Census Bureau, like the January report claiming tens of thousands of retail jobs were added.
Lower rates and bigger govt spending is on the way. “Monetary policy is infinite.”
While i note your point about S&P 500 companies doing everything with their cartloads of cash except reinvesting it in their own businesses, i read somewhere that consumers are taking second, even third jobs, empty aluminum cans, gold fillings out of their mouths, anything with a cash exchange value, in order to pay down their mortgages, car loans, credit card bills, insurance coverage, student loans and everything else they owe – none of which counts towards sales.
People are up to our eyeballs in debt and after the monthly nervous breakdown is over, the remaining tree-fiddy ($3.50) in their pockets isn’t going to boost anyone’s bottom line.
Where did I read that? Was it on the Testosterone Pit website?
Car headlights were invented so drivers could see the road ahead in the dark and respond accordingly. However, they’re pretty useless when you’re careening downhill on an icy road.
Nonetheless and always, thank you for keeping me informed.
If you read that on Testosterone Pit, you’ve got a great memory!
That name still makes me smile…
And thanks for coming to my sites for all these years!
“i read somewhere that consumers are taking second, even third jobs”
You beat me to it. Multiple low-paying jobs inflate employment figures:
Multiple Jobholders Boost “Full-time” Employment
Jan 8, 2016
Also, the annual income for a person to be considered “employed” is ridiculous:
What’s the Real Unemployment Rate in the U.S.?
June 16, 2015
After presentation of gov’t figures within the article, the conclusion:
By my reckoning, roughly 60% of the civilian work force is fully employed and 40% are marginally employed (i.e. earning less than $15,000 annually) or unemployed. Since full-time workers even at minimum wage earn close to $15,000 annually, I think it is fair to use that as the cut-off for fully employed. The BLS counts 121 million people as “usually work full-time,” but given only 100 million workers earn $15,000 or more, this doesn’t add up unless we include self-employed people earning very little who are counted as full-time workers.
Based on income, I set the fully employed rate at 60%, and the marginally employed/unemployed rate at 40%. If we accept the BLS’s 121 million full-time jobs (which once again, this doesn’t make sense given even minimum wage full-time jobs earn $14,500, and 50 million people report earnings of less than $15,000), we still get a marginally employed/unemployed rate of 25%: work force of 160 million, 121 million fully employed.
These numbers align much better with the real economy than the official unemployment rate of 5.6%.
It’s nonsense to count everyone earning a few hundred or few thousand dollars annually as being employed in the same category as full-time workers or those earning $15,000 or more annually.
Forgot the link to the above analysis of BLS figures vs income:
What’s the Real Unemployment Rate in the U.S.?
June 16, 2015
You beat me to it–wanted to also make the point that a) BLS labor stats are definitely inflated/faked and b) the number of part-time jobs counted just like a full time job can make the labor numbers look like they’re going up even as labor costs are staying the same or even declining.
Job sharing? Employing 2 people part time might be cheaper than employing 1. Impact on sales nil but cost to the company lower?
Being a greedy, white, capitalist pig, male business owner…..I never hire FULL TIME. Better to hire all part-time since they appreciate it, work harde,r and you don’t have to deal with most of the legal crap.
The #1 Reason to never hire anybody is 1) Obamacare and #2) Legal Liability. As soon as you hire any person, the laws turn on you and will punish you. NEVER HIRE ANYBODY.
Today, to hire another person…to provide jobs…..is absolutely stupid. Open a factory in China, etc where you are free.
Maybe slightly off topic but pension funds in Britian and Ireland are now being seriously squeezed …
Simple explanation? Oil prices drop, handing a windfall to the average american who spends a fair bit filling up their vehicle every week. Part of the saving is saved and part is spent at restaurants/bars. A dollar spent at a restaurant creates more jobs than a dollar spent at a gas bar. Total sales drop, jobs up and productivity down. Happening every day across america in every family with a vehicle.
The “recovery” from the ’08 crash has consisted of easy money made available to publicly traded companies who promptly turned around and bought back their stocks thereby increasing their value. This is market manipulation, plain and simple. Most job creation has been in the low paying service sector. The next crash will make the last one seem like a day at the beach. The credit industry occupies a huge percentage of US GDP. Flat productivity at best. We are witnessing the biggest ponzi scheme in history.
Correct. It’s an accident waiting to happen.
Well six months ago you reported that Tech and start-up was going Kaboom… linkedin lost half its value and yahoo was just surviving… and Bam… they got bought out for ridiculous prices…
It’s very local… In South Bay SV, all I see is new cars and packed restaurants, packed sporting events which I stopped going after the 2008 crash.. $120 base tix and $15 beers… thanx but no thanx.
I guess people spend all money in their house and cars… no housing inventory for sale and plenty of new cars on the roads or parked outside the houses…I guess a lot of people will lose their jobs, then their cars, houses, and marriages… and we’re not too far from it.
TONS of housing inventory for sale in SF. Condos, condos, condos….
Can’t help to notice the condos going up while driving through Livermore area either.
or ‘whistling past the graveyard’ syndrome……
Sign of market top is when a company acquires another using inflated “currency” often pumped up via issuing bonds to buy back shares and/or issue more shares. Or that the acquirer flushed with cash cannot find decent investments which I think is the case of MSFT buying LinkeIn but MSFT’s acquisition track record is poor like Nokia and AQuant (both were total write-offs). Heck they even bid for YHOO years ago. I guess both LinkedIn and YHOO were “bargains” as they were trading off their highs with Verizon buying YHOO for what may be worthless assets as who uses YHOO for news now days?
SillyCON valley is ripe for tough times ahead as it was hit pretty badly back in 2001/2 (mostly hardware companies back then) and now if brimming with Web 2.0 social media darlings. The over-confidence exhibited by millennials who have not faced tough times (maybe a few back in 2008) means fall may be harder and the ever hopefuls may be humbled…
Back in 2000 it was not only hardware but lots of Web too. ala Excite, altavista, pets.com, zzz.com and the like and along with hardware.
I’m Millenial @ 33 years old and was in college back then, after we got booming good years in 203-2007 then Great recession.
These kids who are 22-28 now coming out of college making six figs off the block will be in for a rude awakening, when these useless social and food delivery apps fold and major players layoff big time.
An observational aside – in 2005 I used to go to Panera bread for breakfast on the way to the office – wondered why I was going to work at all, when I overheard daily discussions between people my age talking about making “10s of thousands a month” flipping homes and writing home loans. Solution – I stopped going to PNRA and gave up trying to figure out the insanity.
August 2007 – An article in the WSJ caught my eye about the repo markets and credit facilities freezing up. December 2007 everyone in my area seemed to be in new cars and houses, which were then losing a little value but would “soon be back up” and I got an email from a real estate guru saying “Don’t let the media scare you into not buying the home of your dreams now”. (Funny that I didn’t get a reply when I responded that I’d give them 50% of their asking price,, which actually turned out to be near the 2011 low of this cycle, which at the time was already 50% off what they paid for the house.)
Anyways, we saw in 2008 how quickly it all came tumbling down, when there were many warning signs, people used their eyes and their social networks to convince themselves it would only affect others, until it affected them. Nothing has changed and there is no reason the whole thing can’t or won’t happen again, and then it will be back to the “no one could have seen it coming”.
What? you mean that something could go wrong with car sales that are 103% LTV no money down, bad credit OK, no payments for 3 months. and a flat screet TV if you buy something over 30K.
Or the 3% down for a house with sub-standard credit of 620. Share resources buying program when 4 or 5 family member pool their money to buy and make pmts. Where hedge fund arsehols buy lots of properties in a zipcode to set and dictate high rents to meet their ROI
It ain’t no lala land. shite will hit the fan..
I wonder if the measurements of productivity apply uniformly across all “industries”. Perhaps the yuge increase in waiter and bartender jobs isn’t being reflected in “productivity”?
(Waiter, another shot of hopium, and make it more productive this time!)
Tim Worstall already beat you to it, writing one of the stupidest things I have ever read:
“we have Facebook marked down as providing some $18 billion of economic value, that should then translate into perhaps $36 billion of consumer surplus, which is the true measure of how we’ll we’re doing as humans. And yet that’s obviously ridiculous: something that 1 billion people do for an average 20 minutes a day simply cannot be valued at such a low number.”
Seems like inventory for many things is climbing fast. From oil to housing to Chinese goods…over supply is hitting the market and driving down prices…the production shows growth, but the employment is tenuous at best …and the Fed sees all this.
It was the Industrial Revolution between 1865 and 1900, that drove down the cost of everything, in terms of gold coin. The price of wheat dropped 90%. The price of shipping this wheat dropped 90% due to the railroad invention, etc. etc. (The railroads dropped shipping prices 70%, rather than this 90% since they kept the 20% difference and people complained about that. Thus, William Vanderbilt said: “The Public be damned”. And he was right.
When the Pennsylvania Railroad attempted to lower wages in 1885, due to the fact that all products and services were dropping is costs (gold coin) they had to cut wages even though the workers, at the lower wages, had a HIGHER standard of living.
Let me explain. In 1870 you get $1 an hour. Bread was 10 cents. Now it is 1880, you get paid $1 an hour but bread is 5 cents. The Pennsylvania Railroad had to compete with the new lines, built in 1875, that could ship twice as much for half the price since they were using the new Bessemer Steel Rails from Carnegie. So, even if your pay was cut 25%, you lived BETTER….but the Amalgamated Communist Labor Union said to go on strike…and you did…..and it all was a mess. You lost your job. The Pinkertons killed your brother and all hell broke out, even though you worked LESS for a better life.
The concept of “Monopoly” (one company controlling it’s product line, be it Sugar, Meat, Steel, Oil) was necessary. Rockefeller had no choice. Either one company to stop the madness or they all entered bancruptcy. It was a “no brainer”.
The bankers love to suck the unsuspecting fool in. The economies booming, the stock market is a record highs. Spend and borrow like it will never end…..until it does.
I’m fascinated by how spending on the current election may be impacting the economy. The lower overall spending due to Trump holding on to his money has to affect the economy. Political operatives make big salaries and there are not that many on the Trump team. Maybe his lack of spending is what is fueling the rage towards him by the media. I am definitely watching less tv news.
Trump is supported by the “people”.
Nothing is more hated by the 1%, or the media, than the “people”.
Imagine the peasants and workers voting in a President. Disgusting.
“Trump is supported by the “people”.”
Trump is supported by a shrinking minority of the country, and has the least diverse group of supporters ever from a modern candidate. His supporters are the definition of low information voters. Watch any interview with his supporters and you’ll hear about rigged elections, rigged polls, Obama will start martial law and take a third term, and on and on and on. I’ve never heard more consistent nonsense from any group of voters in my life.
“Nothing is more hated by the 1%, or the media, than the “people”.”
Trump was born a 1%er, he’s a 1%er to the absolute core. The things people can convince themselves of…
Swing-states are polling blue, and a few Red states are turning pink. It’s looking like a Democratic landslide in November, it may even rub off to increase House and Senate wins.
“Maybe his (Trump’s) lack of spending is fueling the rage toward him by the media?
You’re kidding right? You don’t think the “rage by the media” has anything to do with what Trump says and does?