| Productivity growth is driving output and profits up and costs down, restraining employment gains, and will keep inflation and interest rates low. Get ready for a second great wave of productivity growth when telecom investments bring high-speed communications access to small towns, small businesses, and homes.
Productivity growth is driving the economy. This morning’s report on productivity and costs (http://www.bls.gov/news.release/pdf/prod2.pdf) shows the force that is driving resurging US growth. A tidal wave of productivity growth, caused by advances in advances in communications technology, is raising output per hour of work. US business sector productivity rose at a 4.5% rate in the first quarter, 5.5% from first quarter a year ago. Manufacturing productivity rose 3.1% (5.3% over year ago), and durable goods manufacturing rose an incredible 5.9%, and 7.4% from a year ago.
Increasing productivity also lowers costs and increases profits. And it reduces an employer’s need for workers unless matched by an increase in customer demand. In the last year, business sector employers have increased output by 5.8%, and increased hourly wages by 4.2%, with no increase in worker hours (0.2%). This pushed unit labor costs—labor costs per unit of final product—down (-1.3%) for the year. In durable goods manufacturing, the results are even more striking; output increased by 5.7%, employment (employee hours worked) fell (-1.6%), which drove costs per unit down by (-2.4%).
Not all companies are created equal. Big companies—those who have been most able to take advantage of high-speed telecommunications and most able to deploy fast, communications networks within their company—knocked the cover off the ball. New data show that in the fourth quarter of 2003 nonfinancial corporations increased productivity by 6.2% and increased output by 5.4%, while shrinking employment ( -0.7%) and reducing labor costs per unit of product by (-1.9%). As a result, profit per unit increased at an incredible 27.1% rate for the quarter.
The full year numbers are even better. During 2003, US nonfinancial corporations increased productivity by 5.7%, the largest increase in the history of the series, which goes back to 1959. Output grew 4.2%, employment fell 1.5%, unit labor costs fell (1.5%), and profit per unit increased by 20.5%.
This report is extremely important for two reasons. First, it shows why the fears about strong job growth, rising inflation, and rising interest rates that pushed bond yields up by 50-70 basis points last month are unwarranted. Demand is not growing fast enough to offset the incredible growth of productivity that is driving the growth of US economy. Output will continue to rise, but job growth will remain subdued, labor costs will continue to fall, inflation will remain under control and profits will continue to grow.
Second, this is just the beginning of the productivity story. As the numbers above show, productivity gains to date have been concentrated among large corporations. The high-speed communications systems the big companies used to improve operations simply were not available to small companies. That is changing dramatically. President Bush has announced that he will make universal broadband access by 2007 a national priority. The Kerry campaign has similar plans. Congress is gearing up to rewrite the telecom law to improve incentives for telecom investments once the elections are over. Every major telecom company has a business plan which focuses on bringing broadband to small towns, small businesses, and homes. We are going to see a second great wave of productivity growth in the next five years as small companies get competitive. This means rising output, falling costs, low inflation, rising profits, and low interest rates are going to be with us for a long time. This is a great environment for equities.
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