If you think the 6.1% drop in first-quarter U.S. gross domestic product was bad, then don’t go to the end of Wednesday’s report from the Commerce Department.
An appendix table noted the nonfarm business value added, which economists use to estimate productivity, plunged an even faster 8.2% last quarter, at an annual rate.
Still, nonfarm productivity, which is defined as output per hour of labor, will likely come in flat or down only slightly for a second-consecutive quarter — a heroic effort, given the extent of the economic contraction over the past six months.
Productivity shrank just 0.4% in the fourth quarter, at an annual rate, despite a 6.3% contraction in GDP and 8.8% drop in nonfarm value added.
J.P. Morgan Chase economist Michael Feroli said the mix of output and hours-worked figures suggests productivity was roughly flat last quarter. For 2008, productivity grew an astounding 2.8% from 2007 even as the economy suffered through its worst recession in decades.
To put that in perspective, the last time the U.S. had recessions approaching the current one in severity, in the mid 1970s and early 1980s, productivity posted quarterly drops of as much as 5%.
If productivity’s recent resilience reflects a stronger underlying trend than economists have assumed, it bodes well for an eventual recovery. Companies that are already lean and efficient are more likely to add to payrolls and boost investment once the clouds lift.
But there’s another, darker interpretation to the recent productivity figures: Companies may be cutting staff and investment so much to reduce costs that they cripple their underlying efficiency over the long run. Gross private investment plunged more than 50% last quarter at an annual rate, according to the GDP report. Even equipment and software fell by more than 33%, suggesting the investment drop is more than just homes and buildings.
In other words, with productivity, there is such a thing as too much of a good thing.
Barry Bosworth, a productivity expert at the Brookings Institution, said the U.S. may be near that tipping point.
“So far, [companies'] actions on employment have been justified by subsequent declines in output,” he said.
However, “I would agree that if you think you’re going to have a recovery — which you hope firms are still planning on — it’s getting to the point where they’re endangering their ability to expand in the future,” Bosworth said."