Productivity Strong as Firms Cut Hours
Nov 7 5:08pm ET
By Barbara Hagenbaugh
WASHINGTON (Reuters) - U.S. worker productivity rose in the third quarter as firms cut workers' hours at the fastest pace in 10 years, the government said on Wednesday in a report suggesting firms are rapidly adjusting to the sagging economy.
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Economists hailed the data as a sign firms have responded rapidly to the slowing U.S. economy by cutting workers and hours quickly enough to keep productivity gains in place.
The author's understanding that "firms responded by cutting workers and hours quickly enough to keep productivity gains in place", is incorrect. The productivity computation fails to recognize that to achieve an economy of scale certain labor inputs must be secured. Once that is done other labor inputs are added whose value is less than the original core inputs. These marginal workers are first to go and the effect of their going is output undetectable, but the total man hours worked is reduced. So the productivity is skewed when actually productivity change is zero and has been for a year.
"We've seen businesses defend the bottom line in ways that we've never seen before even before September 11," said Diane Swonk, chief economist at Bank One in Chicago.
Diane should check business's common stocks to find out how much business has failed at defending the bottom line. Can you believe she's chief economist? Must be a token appointment achieved when liberation was in flower.
"But, as good news as it is for productivity and profits, it also means near term, worse news for the employment situation and consumers," she said.
Any corporate manager would tell her that when number of employees is falling, so are profits.
LABOR COSTS LOWER
"It's a great picture, it reduces unit labor cost growth, which improves the inflation outlook. Awesome," said Ian Morris, chief U.S. economist at HSBC Securities in New York.
"It reduces unit labor cost growth". And I thought Diane was bad. Assuming he meant unit labor cost by deleting the word "growth", such costs rose. They did not fall. The reason is that if the operating level achieving an operating economy of scale loses marginal labor support, whereas output will remain the same, the ability to maintain the efficiency, the profitability, is constrained and will fall when there's an increase in marginal demand for the operational output. Part of the function of the marginal workers that were let go was that during demand expansion they could fill in to enable operating at a higher operating level maintaining output efficiency. Now they are gone and ramping up will add to costs. So nothing is gained, but productivity is implied to fall by these factors. Productivity is one of the most constant quantities in economics and is based on the solid asunmption that no one is a bigger slob than anyone else.
In another piece of positive news for the economy, the Federal Reserve reported on Wednesday that U.S. consumers kept using their credit cards to finance shopping excursions in September. The gain surprised economists who had expected a drop in credit usage in September as consumers significantly cut spending in the wake of the Sept. 11 attacks.
Why should this be good news? Aren't these hacks always saying that we need more savings and less credit card use? Why would it surprise economists? Does a cut in spending imply a decline in credit card usage?
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"VERY UNUSUAL"
Economists warned productivity, which measures the efficiency of the labor force, will likely not look as good in the fourth quarter as firms and their workers divert time and attention to security issues in the post-Sept. 11 environment.
Efficiency of output is scale invariant with respect to timeout down to a cutoff.
"Although the necessary reallocation of resources to enhance security may restrain advances in productivity for a time, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate," the Fed said.
I wonder who composed this comment, "once the unusual forces restraining demand abate"? What unusual forces? What is restraint of demand? Is this an impossible conceptualization? Is that what we have here? Restraint of demand??
Ironically, productivity grew strongly in the third quarter even as the economy experienced its first quarterly contraction in gross domestic product, down 0.4 percent, in eight years.
Usually, productivity sags in an economic downturn as firms hoard workers in anticipation of an economic turnaround.
This never happens. Wasn't it claimed above that cutting workers increased productivity? I guess, usually, firms seek less efficiency and less profitability, at least in this liberal's view. |
