Productivity Gains Are Good News for Both Investors and Job-Seekers

It sometimes feels as if every piece of news about the economy, good or bad, comes with a qualifier. A company's quarterly earnings increase -- but it doesn't meet Wall Street estimates. Existing-home sales rise -- but median home prices simultaneously dip. Initial jobless claims fall -- but continuing claims rise.

However, one statistic has had an unqualified, unabashedly positive run throughout the painful Great Recession, and it's continuing that way: the rise in U.S. worker productivity.

Productivity, or the output per hour worked, rose at a 2.5% annual rate in the third quarter and will probably average between 2% and 2.5% higher for full-year 2010, unless the fourth quarter had a substantial (and unexpected) drop-off.

That 2010 increase follows annual gains of 3.5% in 2009 and 1.1% in 2008. Despite some of the worst business conditions since the Great Depression, most corporations found ways to increase efficiency and do more with fewer employees.

Gaining in Bad Times and Good

U.S. productivity gains averaged about 2.8% during the 1948-1970 period, then slumped to 1.6% from 1971 to 1995. Starting in 1995, however, the technology revolution -- led by the personal computer, microprocessors, and the Internet, among other breakthroughs -- propelled an increase in productivity back to about 2.5% a year in the second half of the decade. That higher rate helped create the record earnings and rising real incomes that characterized the Roaring '90s.

And despite two recessions and the extra security costs of the post-9/11 era, U.S. productivity growth has shown few signs of slowing, having increased at about a 2.4% rate during 2000-2009.

Admittedly, part of the increases stem from outsourcing -- especially since 2000. But part of the rise is also the result of businesses implementing more efficient processes, using both new technology and old-fashioned methods.

Widespread Benefits

For investors, those continuing gains in productivity mean U.S. companies are lean and in better shape to battle for market share versus global competitors. That bodes well for the international revenue of these companies and ultimately, for U.S. stock prices.

Productivity gains can also help contain inflation. For example, when a U.S. auto manufacturer finds ways to increase production efficiency, it can offset cost increases in raw materials to the point that the company doesn't have to increase the car's price in the next model year.

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Economists also say rising productivity usually leads to increases in real median incomes, as businesses can increase the wages they pay without increasing their per unit costs. However, due to the enormity of the Great Recession's layoffs, and the high unemployment they created, many businesses over the past few years have looked at their excess capacity and the huge surplus of workers in the job market and concluded they had little need to share the benefits of productivity-driven earnings gains with their employees.

Even so, if past U.S. economic recoveries are indicative, employees should soon begin to reap some of those gains as labor markets continue to heal and unemployment declines.

The one downside to increased productivity, at least in the short-term: It clearly has resulted in fewer new jobs being created. And with excess production capacity in available in several sectors and lower-cost production centers abroad growing every year, this lower-than-normal job growth trend could continue for some time.

Creating a Healthy Commercial Environment

But economists generally agree that this shouldn't sour anyone on productivity's undeniable long-term benefits. Among those are more efficient, more competitive U.S. companies and the accompanying increased appeal to investors; the more efficient deployment of resources; lower costs per unit produced; the freeing of capital for new investment; the wider use of technological advances and other quality-of-life improvements.

America's strong productivity growth creates a commercial environment that's ripe for launching new projects and creating new businesses -- as well as new jobs, later if not sooner.