Sunday, March 26, 2023
HomeMarketThere's a magic potion to fix the U.S. economy's ills. Finding it...

There’s a magic potion to fix the U.S. economy’s ills. Finding it is the hard part.

- Advertisement -

There’s a magic elixir of sorts that can help workers earn more pay, maintain strong business profits, and even fight high inflation at the same time. What’s less clear is whether the potion is available to the U.S. economy.

It’s called productivity. Or in layman’s terms, the ability of workers to produce more goods and services in the same amount of time than they did in the prior year.

Imagine an factory worker, for example, who produces four medical masks in an hour. A year later he makes five masks an hour —a 20% improvement in productivity.

In that scenario, in theory a business could raise the worker’s salary by 20% and still keep the same level of profits. Inflation, for its part, wouldn’t change since the greater supply of masks may cancel out the increase in spending by the enriched worker.

Rising productivity was a hallmark of burgeoning economy after World War Two, making the U.S. the richest country in the world. Emerging technologies, new inventions, better business practices, and rising education all came together create a huge economic boom.

Then productivity began to fade in the late 1970s, with the slowdown becoming especially pronounced after the 2007-2009 Great Recession.

The growth in productivity perked up at the end of 2022, increasing at a 3% annual pace. The big question is whether such gains are repeatable.

Wall Street
economists are very skeptical given a long downward trend.

The rate of productivity growth, for instance, averaged just 1.3% from 2010 to 2022. That’s down down from a 2.2% clip from 1981 to 2009 and 2.8% from 1948 to 1980.

In a new report, the Congressional Budget Office forecasts productivity could rise a bit more to an annual rate 1.3% in the next five years and 1.4% in the five years after that.

Many forecasting firms have produced similar estimates. Oxford Economics predicts productivity will rise 1.4% in the long term — down from its prior 1.6% estimate.

“New ideas seem harder to find and harder to implement,” said Micheal Pearce, lead U.S. economist at Oxford.

He points out the slow emergence of self-driving cars, which generated huge buzz just a few years ago.

Another roadblock is relatively soft business investment. Companies spend less on equipment and research than they did several decades ago, depriving the economy of the money needed to lay the seeds of higher productivity growth in the future.

Some speculate the current labor shortage in the U.S. could prove long-lasting, giving companies the incentive to invest more in technology as a substitute. Yet so far there’s little sign of that happening.

The CBO report contends the pandemic could speed up the adoption of new technologies and business practices, pointing to telework and telemedicine as examples.

Remote work could also ease the nationwide labor shortage, the CBO said, and lead the creation of new business models and employment opportunities.

“Many argue that working from home boosted productivity,” noted chief economist Eugenio Aleman of Raymond James. “People didn’t have to drive to work and waste time commuting.”

Aleman is not entirely convinced. Still, he said some industries are adopting new technologies to improve productively and cope with a labor shortage, mostly in low-skill industries with lots of repetitive tasks.

He points to the growing use of computers and robotics at businesses such as restaurants to take customer orders, fry French fries or make pizza.

Yet most higher-tech industries are unlikely to be able to do the same, he said. Aleman predicts productivity will continue to grow around 1% to 1.5% a year — in line with most forecasts.

“Businesses still can’t count on a sustained productivity revival,” said Lydia Boussour, senior economist at EY Parthenon, in a recent note.


- Advertisment -

Most Popular