Excellent news on productivity

Good afternoon everyone,

I have been talking about the difference between ephemeral economic growth vs. real economic growth for a while now. Real economic growth is closely approximated by productivity growth. So if we are looking for signs of an emergence from recession we would want to see increases in productivity. Lo and behold! Productivity in the second quarter of 2009 grew 6.4%.

This is a very good sign that the economy is in the midst of recovery. Why? Just prior to a recession occurring there is over-employment in the economy. Workers who have been hired to handle and manage marginal business become the business “fat” that needs to be trimmed when the marginal business erodes or disappears. The reverse is also true.

When layoffs of the size we have seen in the last 12 months happen businesses are running very, very lean. This means that as new sales and accounts flow into a business that employees are overstretched trying to cope with increased business and low staffing. This shows up in the numbers as an increase in productivity. More sales over the same employee base looks like efficiency. But if you are one of the workers so affected, it feels like slavery. So this is not a sustainable solution for businesses.

Dramatic increases in productivity foresage increases in hiring. Because permanent workers are so expensive to a business they add them only reluctantly. This is why increases in employment are a lagging indicator of economic recovery. Thus an increase in productivity is an indication that we are near the end of a recession.

So a portion of the increase in productivity is simply too much work for too little people. However, a portion of it is also very likely to be the Holy Grail: real economic growth. Real economic growth is the solid foundation underneath a healthy economy. All in all, this is a good sign that the recession is almost over and that the new growth upswing is based on solid fundamentals.

Jason