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What's going on?
The productivity of US workers fell once again in the first quarter, according to data out on Thursday highlighting one of the key headwinds to economic growth.
What does this mean?
Productivity, in this context, is the amount of goods and services US workers produce per hour. And it fell at its fastest rate in a year in the first quarter, continuing a downward trend that has persisted since the early 2000s. Productivity growth is a key driver of economic growth (think: if a car is made more efficiently, then Ford can build more cars in a year and, therefore, make a greater contribution to the economy). Therefore, declining productivity growth creates a big headwind for economic growth.
Why should I care?
For markets: The cost of workers is going up at the same time as productivity is stagnating which is bad for corporate profits.
A measure of labor costs (which includes things like pay and benefits) rose 3% in the first quarter versus the previous quarter. So, at the same time that workers productivity growth is slowing, they are getting more expensive for companies to employ. Needless to say, paying more and getting less output is a bad combination for companies.
The bigger picture: Higher spending by businesses should improve productivity.
The good news is that spending by companies has increased recently its been one of the bright lights of the US economy so far this year. This sort of investment from businesses like buying new equipment should improve productivity (e.g. workers can produce more with new, rather than outdated, machinery). Of course, for that to be the case, companies have to spend their money wisely (buying bad equipment wont help!). It would be a very good sign for the US economy if the increased spending by businesses translates into higher productivity.
Originally posted as part of the Finimize daily email.
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