Drop in productivity in 2nd quarter may have been a temporary setback XTC

The Outlook

August 16, 1998|By J. Leffall

THE PRODUCTIVITY of U.S. workers -- or output per worker hour -- shrank for the first time in more than three years during the second quarter, prompting a sharp pickup in labor costs. The 0.2 percent decline in this closely watched indicator of the economy's health surprised analysts, who had been expecting a 0.5 percent increase, and pushed unit-labor costs up 4.1 percent, the strongest rise since the first quarter of 1994.

Why is productivity so important?

What's behind this unexpected drop?

Is it temporary?

Greg Jones

Chief Economist, Briefing.com, Jackson Hole, Wyo.

It's important to keep productivity numbers in perspective. Often, quarterly data is not indicative of ultimate growth in productivity. What we've seen here in the second quarter comes as a result of a temporary slowdown in productivity.

There is definitely a very cyclical element to productivity growth as businesses continue to react to Asian weaknesses and slowdowns in demand for products.

If you look at the bigger picture though, you'll see that over the last four quarters there has been a 1.9 percent growth in total proued slow growth in productivity, a particular company, for instance, would basically have to continue a trend of hiring less skilled workers. Labor markets are tight and skilled workers are hard to come by. In the future, if there were to be another slow growth trend in productivity, the plethora of unskilled workers and low unemployment would be the deciding factor.

In the short term, the economy will see a rebound in productivity for the remainder of the year. Looking beyond that, there are two major deciding forces: unskilled workers, like I said before, and massive growth in business investments, which is a good thing. These contrasting factors should offset one another and keep the economy up around that 2 percent level in productivity that we've seen.

James Glassman

Economist, Chase Manhattan, New York

This downward trend is not too meaningful really, because it comes on the heels of a decent pick-up in productivity in recent months and recent years.

What happened is that the economy hit a speed bump in the second quarter and this took its toll on productivity. Business costs are not changing much, so this decrease is not indicative of a long-term trend. The drop did contribute to soft earnings almost across the board for the second quarter.

With all of the technological changes, the Fed is optimistic. I also think there is a reason to believe that productivity will get back on track fairly soon. It may not be immediately because of continued shock from Asia. Initially, we won't see huge growth. The economy is slowing and as a result productivity will reflect that.

We are now in a very mature stage of the business cycle. Companies are just going to have to be smarter and figure out cost effective ways to maximize output. That will keep productivity up.

Lacy H. Huntington

Investment Management Co., Austin, Texas

The productivity growth ease came in the second quarter because of the economy as a whole dropping abruptly to 1.4 percent growth, and that always is going to result in the decrease of productivity.

When you talk about slowdowns in productivity, you have to address the macro economic elements for that particular quarter. Whenever you have a major strike such as the one at General Motors, these stoppages put a damper on the economy and the productivity in the second quarter.

For the long term, global economic conditions are continuing to deteriorate. This has spread to the Middle East and parts of Eastern Europe and Africa. For firms to maintain their profit margin, they have to increase productivity and reduce costs of operation.

The economic environment is becoming more tenuous on a daily basis, but there are a growing number of signs that the economy here is being adversely affected as we are seeing firms display negative pricing power.

Productivity will rise though. At the very least it will rise out of necessity because of the deteriorate economies abroad.

Bill Cheneyter

Chief Economist, John Hancock, Boston

There were a couple of things going on in the second quarter that stifled productivity. One was the ever-present situation in Asia and the other, several inventory corrections here. It's really a matter of businesses not balancing output with work force. If you think of the typical manufacturing process, companies cut back on production without cutting workers. Maybe hours are reduced, but you have the same amount of workers with less production. That gives you low output and leads to low productivity.

This drop in the second quarter is really just an accident and not a new trend. It's merely an unexpected but natural result of a slowdown in output.

Essentially what's going to happen is output growth will eventually pick back up. Consumers are still spending like crazy and housing is being built at a fast rate, so that right there will help productivity stay on its toes.

I'm relatively optimistic. I think as we get into the the second half of the year, productivity will return to a healthy rate.

Pub date: 8/18/98

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