US Productivity Growth Loses Steam as Living Standards Forecast to Crawl

Labour productivity growth in the United States has lost momentum "significantly" over the last year, compounding the fragile state of real GDP rise, in the aftermath of the Great Recession of 2008.

It will have important economic consequences including a painfully slow rise in living standards, according to a report.

Nonfarm labour productivity in the second quarter of 2013 rose only 0.3% from the same quarter a year ago, whereas it had risen 3.5% in the first year following the end of the recession, a research report from Wells Fargo Securities showed.

Labour productivity is an indicator of the economic growth and the standard of living of the people in a country as it measures the amount of real GDP produced by an hour of labour and a rise in it is usually seen as reflecting rising standards of living in a country.

"Failure of labour productivity growth to strengthen on a sustained basis would have important economic consequences. Not only would the long-term growth rate of the US economy be weaker than otherwise, but growth in per capita real disposable income would also remain weak. In other words, living standards in the United States would continue to improve, but they would do so at a rate that may feel frustratingly slow to many Americans," said the report.

Moreover, the report says that according to some research findings, the US economy may have recently entered a new era of prolonged low productivity growth.

Usually labour productivity zooms in the initial years of economic recovery after a recession.

However, the rise in labour productivity after the most recent recession has been the weakest among all post-World War II expansion cycles.

"Since the recession ended 16 quarters ago, non-farm labour productivity has risen 6.0% in aggregate, making it the weakest increase in productivity among post-World War II expansions that have lasted at least this long," said the report.

The annual average rise in labour productivity in the post-recession period was only 1.5%, and this new phase of slower growth in productivity will have far-reaching consequences, the report says. First and foremost, growth in labour productivity is directly connected with growth in real per capita disposable income.

"If workers can produce more output per hour worked, then their pay should increase. Conversely, if labour productivity growth slows, then compensation gains should downshift as well. Therefore, if labour productivity growth remains weak, the paltry pace of real income growth that the country has experienced in recent years seems set to continue."

Policy Implications

Weaker productivity growth also means lower potential GDP growth, and this will have important policy implications, including how the central bank adjusts its monetary policy to battle a potential rise in inflation, the report says.

"If the economy's potential growth rate has slowed, then inflation likely will rise more quickly for a given rate of actual GDP growth. As a result, the Federal Reserve would need to tighten monetary policy more quickly to keep inflation in check."