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Reasons to be cheerful
By John M. Berry
John M. Berry, who has covered the economy for four decades for the Washington Post and other publications, is a guest columnist.
Doing more with less is a corporate mantra that some say bodes ill for job growth. Data last week showed that productivity at non-farm business jumped at an extraordinary 9.5 percent annual rate in the third quarter.
Yet the sharp gains in efficiency are helping drive corporate profits and that could be just what’s needed to convince employers that it’s safe to begin hiring again.
Furthermore, it isn’t just profits that are improving. Workers’ inflation-adjusted hourly compensation rose 2.1 percent over the past four quarters after falling by about the same amount in the preceding period.
All this is extremely unusual during a recession. On a year-over-year basis, output per hour worked increased continuously amid the sharp decline in economic activity. And as productivity gains accelerated this spring and summer, labor costs per unit of production fell out of bed. They are down 3.6 percent for non-farm businesses since the third quarter of 2008.
That’s where the added profits are coming from — lower costs, and recently, more production as well.
As Ken Mayland of ClearView Economics in Cleveland recently told clients, nominal gross domestic product, which increased at a 4.3 percent annual rate in the third quarter, “is akin to ‘total revenues’ for American companies. It’s growing. And with all the cost-cutting that companies have executed, a lot of these revenues have dropped to the bottom line.”
Nominal GDP is likely to grow even faster this quarter, “leading to more robust profit gains,” he predicted.
Increased profitability is also paving the way for increased business investment, which will be an important determinant in how fast the economy grows next year. After falling for six consecutive quarters, business spending on equipment and software edged up at a 1.1 percent annual rate in the third quarter.
That contributed only slightly to the 3.5 percent rate of increase in GDP for the quarter, but it’s a precursor of things to come.
With the dollar down, exports are booming. Housing construction, after declining for 13 consecutive quarters, has finally turned up. Business inventories are still shrinking, and a reversal of that will also add to demand for goods in coming quarters.
All of those items — along with additional spending from the federal stimulus program — will help fuel the recovery even if consumer spending remains relatively weak.
To be sure, high unemployment and workers’ concerns about losing their jobs are going to be a drag on spending.
But by the first part of next year, the recovery is likely to be strong enough that employers aren’t going to meet the growing demand for their goods and services through added productivity gains alone. They’re going to have to start hiring again.
At that point the unemployed and underemployed workers will represent a major resource that could allow the U.S. economy to grow faster in a non-inflationary way than otherwise it might.
Those new hires, coupled with continuing productivity gains, could easily doom the predictions of some gloomy analysts that the “new normal” for economic growth is a scant 2 percent.