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U.S. Productivity Advances Solidly
Good News for Inflation, Interest Rates and Stocks
by Peter Morici
Today, the Department of Labor reported productivity in the nonfarm
private business sector increased at a 2.6 percent annual rate in the
second quarter of 2007. This was significantly higher than the 0.7
percent increase recorded in the second quarter of 2007.
(there's more)
Since the second quarter of 2006, productivity advanced only 0.9
percent, and this is less than in recent years. However, the second
quarter of 2006 was a particularly strong quarter for productivity and
provides a poor benchmark. Year over year results will be stronger for
the third quarter of 2007.
The housing slump and higher energy prices have slowed sales of
building materials, automobiles, construction equipments, and their
supplying and distributing industries. Businesses have accepted a
somewhat slower pace of productivity advance to avoid laying off
workers. This is a well-reasoned response, because forecasters expect
growth to pick up by mid-2008, and the processes of laying-off and
rehiring are expensive.
Labor Costs, Inflation and the Stock Market
Hourly compensation increased 4.1 percent in first quarter, and unit
labor costs, which factors in higher wages and higher productivity,
rose 1.4 percent. Labor costs pose no threat to accelerate inflation,
and these likely reflect the tighter labor market of 2006, before the
subprime crisis began to bite. These wage increases should not
constrain Federal Reserve interest rate setting policy.
Prospects for inflation remain mostly determined by foreign oil prices,
inflation in China, which supplies a significant share of U.S. consumer
goods, and the value of the dollar against the euro and other non-Asia
currencies. A significant revaluation of the dollar against the yuan,
with other Asian currencies following in trail, would do much to abate
global inflation.
At its September 18 interest rate setting meeting, the Federal Reserve
will weigh the impact of the subprime crisis on consumer spending, for
example for automobiles and other durable goods. Market expectations
point to a cut in the Federal Funds rate to 5.00 percent from the
current 5.25 percent.
Productivity growth fuels corporate profits by permitting U.S.
businesses to maintain or widen margins on domestic operations. Also,
U.S. businesses are taking their innovations abroad, and foreign
operations account for significant shares of U.S. corporate sales and
profits.
Overall, steady or falling interest rates, productivity gains and new
products, and profits from overseas operations should help push stock
prices higher.
Better Productivity Growth Ahead?
U.S. companies continue to bang out new products and more efficient
methods for making goods and services. In the second quarter,
manufacturing productivity is up 1.8 percent. In the critical durable
goods sector, which builds out many of the breakthroughs in information
technology, productivity was up 4.7 percent. In addition, biotechnology
is driving profit growth in the agribusinesses, like Monsanto.
These trends indicate U.S. durable goods manufacturers and
technology-based services should be gaining global market share. But
for the China’s undervalued yuan, U.S. durable goods manufacturers
would not be losing market share and jobs to Asian competitors, and but
for arbitrary restrictions on U.S. investment, the presence of U.S.
services providers in China should be larger.
Productivity should improve as personal consumption expenditures and
business investment drive up the demand for U.S. goods and services in
the first half of 2008. Factoring in a one percent annual increase in
the labor force, the economy could grow 3.5 to 4 percent a year with
the right mix of fiscal, monetary and exchange rate policies.
The overvalued dollar limits productivity gains, because the resulting
trade deficit shifts labor and capital from export and import-competing
industries into other non-trade-competing activities. Trade-competing
industries exhibit 50 percent higher labor productivity and spend much
more on R&D than do the rest of the economy.
Also, the trade deficit shifts the production of new and innovative
products offshore, reducing high-value employment immediately and
increasing the likelihood that next generation products will be
developed as well as made abroad.
Cutting the trade deficit in half would boost R&D spending enough
to push sustainable productivity growth to about 3 percent per year,
and raise potential GDP growth to about 4 percent.
Peter Morici is a professor at the University of Maryland School of
Business and former Chief Economist at the U.S. International Trade
Commission.
Peter Morici
Professor
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
703 549 4338
Cell 703 618 4338
This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
http://www.smith.umd.edu/lbpp/faculty/morici.html
http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm
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