Productivity Growth Fades

Economic Blog
November 7, 2019

Stalled business spending is having ripple effects on U.S. company efficiency.

Nonfarm productivity (output per worker) unexpectedly slid 0.3% in the third quarter, according to a Bureau of Labor Statistics (BLS) report released November 6. As shown in the LPL Chart of the Day, that was productivity’s first quarterly decline since the fourth quarter of 2015.

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Third-quarter productivity floundered as employee hours rose 2.4%, while total output climbed 2.1%. The BLS noted that self-employed workers made an “unusually large contribution” to hours worked in last quarter’s productivity contribution, which could suggest the drop may be temporary.

Still, sustained productivity growth has been a tough feat in this economic expansion, thanks to muted business spending. Higher business investment leads to higher productivity as newer technology and more worker training leads to more efficient production. Productivity growth has been a key part of our economic outlook, as higher productivity could provide a timely boost to output while capping employer costs and supporting profit margins.

Productivity surged in the first two quarters of this year, but positive momentum could continue to fade. U.S. businesses have largely shelved investment in the face of elevated uncertainty. Nonresidential investment has dropped for the past two quarters for the first time since early 2016.

“Businesses have switched to a more defensive stance as they’ve waited for more clarity on unprecedented trade and geopolitical issues,” said LPL Financial Senior Market Strategist Ryan Detrick. “We understand why companies are holding back, but the hesitation to spend could be a material weight on future output.”

Many companies are in the planning stages for next year’s investments, and progress on the trade front could motivate some businesses to resume expansion plans. The United States and China may not solve all their issues with this reported agreement, but even a narrow deal that leads to a lasting truce would be positive for business investment.

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