Justin Merriman/Bloomberg/Getty Images
A worker assembles a product at the Intervala manufacturing facility in Mount Pleasant, Pennsylvania, USA, on Tuesday, January 30, 2024.
Washington, D.C
CNN
—
Americans are about to experience a historic economic event: Inflation returns to normal – after a series of punishing interest rate hikes – without a recession. It's a scenario that analysts call a “soft landing.”
The significant progress made so far may be due to a recent spurt in productivity growth.
Strong U.S. productivity last year meant that workers were able to reap strong wage gains without employers having to pass at least much of the money on to consumers, as they produced enough across various industries and services to cover higher labor costs cover.
In economics, the concept of productivity is essentially what the word itself means in everyday usage. When productivity is high, it means the U.S. economy is doing more with less or is more productive. Since this was actually the case last year, it meant that the economy could grow at the robust pace seen in 2023 without fueling inflation.
Productivity is measured by dividing all goods and services produced in the economy by each hour worked. That rate rose 2.7% in the fourth quarter from a year earlier, higher than the average increase over the past two decades, according to Labor Department data. After a sharp decline in 2022, productivity recovered strongly the following year.
“Productivity is incredibly important to the bigger picture of the economy and inflation, so whether workers will be more productive is an important question that central banks are considering,” said Lauren Goodwin, economist and chief market strategist at New York Life Investments. said CNN.
There is no clear reason why productivity rose sharply last year.
One popular theory is that the spread of generative artificial intelligence may have made processes more efficient for certain tasks. Researchers argue that GenAI could be transformative for the financial and economic worlds, and perhaps for society more broadly, similar to the widespread adoption of the Internet at the turn of the century.
But it could take time for major productivity gains from GenAI to become a reality, as workers will first need to be trained in its use and companies will need to figure out how best to integrate GenAI into their processes, Moody's Analytics chief economist Mark Zandi told CNN before.
Another possibility is that businesses became more productive last year in anticipation of a recession that never happened, economists said. The labor market was robust last year, but some large companies still cut costs, including through layoffs. For example, Microsoft, Meta, 3M and Citigroup cut thousands of jobs last year.
“Many of these companies that laid people off because they expected a significant slowdown are now poor and mean,” John Min, chief economist at Monex USA, told CNN. “But the economy did well, which led to higher productivity, supported higher wage growth and prevented inflation from accelerating.”
Last year's productivity boom could also be a combination of all of the above.
It's clear that Federal Reserve officials consider productivity before making policy decisions. Chicago Fed President Austan Goolsbee told Bloomberg in an interview last year: “You can't say anything about wages until you actually know what's happening to productivity.”
However, the economic indicator is difficult to accurately measure in real time, which is why it has little impact on financial markets when it is released.
In addition, it is published quarterly, the data is usually subject to heavy revisions, and it is difficult to accurately measure the productivity of services.
“The U.S. is primarily a service-based economy rather than a manufacturing economy. So if I count the number of widgets produced per hour, it can be pretty accurate, but on the services side it's really difficult to determine the price.” “The markdown number is because of inflation or because it's a better markdown traded, increased,” said Min.
With 2023 already in the rearview mirror, productivity may have played a role in paving the way for a soft landing.
Still, it may be too early to know whether last year's surge in productivity was truly a transformative change in the U.S. economy.
“Sometimes productivity can be increased at the very end of an economic cycle through cost-saving measures,” said Goodwin of New York Life Investments. “Distortions like reducing working hours might seem like really high productivity, but when you look at the bigger picture, companies are cutting costs by giving people fewer hours and effectively paying them less. So it doesn’t necessarily mean that something is going much better for the economy.”
“However, I expect that we will see productivity improvements through generative tools that will help fight inflation over a longer period of time,” she said.
Comments are closed.