Productivity in U.S. Limps Along as Benefits of Tech Boom Wane

The heyday of worker productivity in the U.S. may have passed.

Employee output per hour rose at a 1.3 percent annualized rate from April through June, following declines of 1.1 percent in the first quarter and 2.2 percent in the last three months of 2014, a Labor Department report showed Tuesday in Washington. Efficiency grew 0.3 percent in the 12 months ended June compared with 3 percent a year on average in the decade ended 2005.

Diminishing returns from the late-1990s boom in investment on computers and software followed by the plunge in equipment spending during the last recession are among reasons the American workforce is now less productive. That limits how quickly the economy can grow without spurring inflation, giving the Federal Reserve something else to consider in deciding when to raise interest rates.

“Productivity growth is looking quite bad,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and the top forecaster of productivity the past two years, according to data compiled by Bloomberg. “It means the economy’s speed limit is lower. For the Fed, it means you don’t need a lot of growth to use up slack labor resources. It suggests an earlier lift-off to a lower point.”

The Labor Department issued revisions back to 2012 with Tuesday’s report to reflect the updated readings on gross domestic product released by the Commerce Department last month.

Productivity grew 0.5 percent on average over the past three years, compared with a prior estimate of 0.9 percent.

Potential Growth

Slowing efficiency restrains economic growth from gaining momentum in the longer term. The pace at which an economy can expand without stoking inflation -- which economists refer to as its speed limit --reflects the rate of growth of the labor force and how much each worker can produce per hour.

Combining productivity gains of around 0.5 percent a year with labor force growth of at most 1 percent would put the U.S. economy’s potential at around 1.5 percent. That would mean Fed officials -- who peg long-run GDP growth at between 2 and 2.3 percent -- are overly optimistic in their assessments.

It also has grave implications for Americans’ standard of living. The more workers produce in a given amount of time, the more employers will be willing to pay them. Conversely, little growth in productivity means wage growth could stagnate.

“The longer it goes on, the bigger impact it has, and the further away real living standards are from where they would have been if productivity growth had continued at, say, 2 percent a year,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto. “It is genuinely a big issue.”

Fed Policy

Policy makers, who have indicated they may begin lifting rates this year for the first time since 2006, have been watching trends in productivity and some have said they expect it to improve.

Economists at Goldman Sachs Group Inc. in New York are among those who believe the productivity figures are being understated. One reason is that it’s difficult to measure the value of software and digital content as quality improves and new products come on line.

While the debate rages on about measurement problems and the outlook for productivity, the persistent slowdown in recent years has more immediate implications for how far and how fast the Fed may raise the benchmark rate once they begin to tighten. It signals policy makers can begin raising rates sooner, with fewer increases in total.

Low productivity is a “serious problem” for the nation, former Fed Chairman Alan Greenspan said on Monday in a Bloomberg Television interview.

Greenspan’s Fed

During his years at the helm of the central bank, as productivity gains picked up between the late 1990s and early 2000s, Greenspan recognized accelerating worker efficiency would contain inflation even as the economy strengthened and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999.

Slowing productivity also may put pressure on corporate profits. Over time, a business facing an earnings threat may be less inclined to sustain the strong pace of hiring the economy has seen this year. Payrolls grew by 215,000 workers in July after a 231,000 gain in June, and the jobless rate held at a seven-year low of 5.3 percent last month.

Another report Tuesday showed warehouses at U.S. wholesalers are filling to the brim as sales cool.

Inventories at distributors jumped 0.9 percent in June, the biggest gain since April 2014, after rising 0.6 percent in May, figures from the Commerce Department showed. Sales rose 0.1 percent for the month, and were down 3.8 percent in the year through June.

Durable-goods merchants, including machinery and auto distributors, had the most stockpiles on hand relative to sales since July 2009, and clothing wholesalers had the most since 1996. Such bloated supply means bookings at manufacturers globally will suffer as companies grow concerned they have too much in stock.

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