Thursday, May 7, 2009

More false hope from economic numbers - productivity edition

We are starting to think that beating markets in this environment is starting to devolve into a reading comprehension exercise. In the latest edition, the green shoots crowd are jumping on the release of productivity numbers by the BLS today - nonfarm productivity is up 0.8%, above consensus numbers at 0.6% after going down 0.4% the previous quarter. However, it's a bad picture when the main driver is due to hours worked dropping 9% and output only dropping 8.2% (poof, productivity gains!).

There are many ways to read this; some may view this as a necessary purge of the fat in our labor economy while others are likely to be alarmed at the increasing weakness of business demand. None of these views are going to be new findings to our readers but we do want to highlight one point when taking a macro view of these productivity numbers.

Much can be said about the tech bubble and even now, "eyeballs" is a phrase that is likely to generate smirks and laughs at the madness of the markets at the time. However, underneath all the fluff and dot com mania there were real productivity gains being experienced in the economy and it laid the groundwork (both literally and figuratively) for huge gains in the internet economy over the coming years. The stepbrother of that story was the rise in real wages; since then however, the increase in household wealth has not been driven by wages but by assets (houses, etc.). Wage growth has been somewhat anemic, bounded by a relatively tight band for the past 8 years or so. With the deleveraging of the US economy and consequently the American household as a major burden, we have to wonder what this bodes for the story of American wealth over the next 10 years or so. The government burden has long been publicized but the quieter enemy is the consumer burden - remember, a decrease in wages is practically no different than an increase in an interest burden. These productivity numbers are somewhat sobering with regards to the hidden story in terms of demand for American labor and wage growth for individual families.
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