Friday, November 6, 2009

9.5% productivity growth. How unusual?

As reported by the Bureau of Labor and Statistics yesterday, US labor productivity grew at a 9.5% in the third quarter of 2009. Fast productivity growth is normally a sign of economic strength, but in this case because it is the result of a combination of GDP growth and destruction in employment, this has raised further concerns about the possibility of a jobless recovery (see Brad DeLong, among others).

How unusual is to see productivity growing that fast during a recovery phase? No doubt that 9.5% is a very large number but we have seen similar patterns before. For example, the 1981Q3 recession showed a very similar pattern of productivity growth as seen in the picture below.

Six or seven quarters after the recession had started, productivity was growing at rates which are very similar to what we are seeing now. Interestingly, the 1981 recession was also a long recession, it lasted 16 months. It is possible that the current recession ended in the summer of 2009 which would make it very similar in length to the 1981 recession.

There is, however, a big difference between the two: in the 1981Q3 recession, we saw GDP growth rates close to 10% (quarter to quarter) seven quarters after the recession started - i.e. the last observation in the above chart. This time GDP is only growing at 3.5% and it is only because of the large decrease in employment that productivity growth is so high. This is not good news (unless we believe that this trend is about to reverse).

What did productivity growth look like in shorter recessions?

This second chart shows productivity growth in the previous two recessions (1990 and 2001). Both of these recessions were short, about 8 months. Productivity also increased in the quarters after the recession started. It started growing earlier (this is probably related to the short nature of the recession) and it did so in a smoother manner with peaks below the current levels.

Antonio Fatás