US: Productivity gains have become very weak in the recent period - Natixis

Patrick Artus, Research Analyst at Natixis, suggests that if we smooth the productivity gains in the United States to correct them for short-term cyclical fluctuations (for example anaemic growth in Q1/Q2 2016, vigorous growth in Q3 2016), we find that productivity gains have become very weak in the recent period: around 0% per year.

Key Quotes

“This situation is surprising: even though new jobs in the United States are unskilled and there may be production measurement errors, the level of investment in new technologies is very high in the United States.”

“What are the consequences of the low productivity gains in the United States, beyond the obvious consequence which is a fall in potential growth?

• The US economy’s return to full employment leads to an acceleration in wages; since productivity gains are low, the faster rise in wages leads to a faster rise in unit labour costs;
• If unit labour costs accelerate, there are two possibilities: either companies have a significant pricing power and core inflation rises; or companies’ pricing power is weak, and their profit margins decline; we are currently seeing this decline in margins in the United States;
• These developments are bad for companies and for the equity market in both cases: if inflation rises, interest rates become higher; if profitability declines, listed companies’ ability to invest and their results decline.”