Productivity Increases And The Employment Conundrum
I remember when I was growing up my father would complain that all this "new **** technology," like facsimile machines and computers, were going to take his job someday. He was right. Eventually, a computer took his job as a warehouse foreman to do the job of inventory management. While people scoffed at the idea that computers, and technology, would ever take the place of humans - the reality is that it is occurring more each day. Receptionists are now replaced with automated directories, many parts of manufacturing and assemblies are done with robots and individuals can now complete the same daily workload that once required several.
The recent release of productivity showed a sharp rebound in the second quarter as those individuals that had a job worked harder to produce products or services. For August, the productivity and capacity utilization report showed a sharp uptick from the first quarter of 2.2%. Capacity utilization also modestly increased but remains below the peak prior to the last recession.
The chart above shows productivity (left hand scale) as compared to the employment to population ratio. You can see the sharp spike in 2009 as companies cut employment and maximized productivity. This boost in productivity is consistent with the focus by businesses to remain lean in terms of employment, which is a major cost center, in order to protect profit margins which are already under pressure. As we showed in our recent report on GDP - the spending on equipment and software has been increasing sharply in recent years to maximize employee productivity while keeping wages and employment suppressed. This has been great for the bottom line of corporate America but has translated to the longest stretch in modern history where individual net worth has declined. The chart below of corporate profits per employee tells the real story.
As I stated above the drive to maximize productivity has usurped the traditional drivers of economic growth in recent years. In the quest to keep employment as low as possible the expenditures on equipment and software has continued to increase. During this century spending on equipment and software has become a significantly greater share of GDP than in the past. The chart below shows four very important items.
As we stated in our report on GDP: "The important focus here, however, is watching equipment and software spending as well as exports. As stated above, with exports now making up 40% of corporate profits, and more than 13% of GDP, a decline in exports due to the recession in Europe, and slowdown in China, will quickly resonate in the domestic economy.
Furthermore, the direction of trend of equipment and software spending is indicative of corporate forecasts about the economy ahead. Cut backs in spending occur as forecasts for economic growth weakens, and concerns about profitability, heighten. The chart above clearly shows that both exports and equipment and software spending as a percentage of GDP have declined just prior to the onset of the last two recessions. The recent decline in equipment and software spending may be telling us something."
Housing and auto manufacturing, while important, are not the economic drivers that they were for many macroeconomic reasons. However, exports and equipment spending have been much more important. With the business environment more globally interconnected than ever before the drive of competition has led to sustained deflationary pressures on prices for both goods and services worldwide. These pressures have to be offset by reducing production costs in order to maximize profitability. The problem is that the increases in productivity, which have resulted in a structural change to employment and increased wage pressures, has pushed a large chunk of the American population below poverty levels.
This is reflected by the record number of individuals now supplementing family incomes with food stamps while dependency on government welfare programs remains near record highs. (For more detail read this)
The recent downtick in equipment and software spending is likely to coincide with a decrease in productivity in the next quarter. With the recent slate of weak earnings and forecasts it will not be surprising to see more cutbacks in employment in the months ahead as businesses take on a more defensive stance against weak aggregate end demand.