Robots and happy workers: The productivity boost explains the surprising resilience of the US economy

To keep up with customer demand, Batesville Tool & Die began looking for 70 employees last year. It was'nt easy. Attracting factory workers to a rural Indiana community of 7,300 was difficult, especially when competing with big-name manufacturers nearby like Honda and Cummins Engine.

There were hardly any job seekers.

“You could count on one hand how many people in the city were unemployed,” said Jody Fledderman, the CEO. “It was just crazy.”

Batesville Tool & Die was only able to fill 40 of its open positions.

Enter the robots. The company invested in machines that could mimic human workers and in vision systems that helped its robots “see” what they were doing.

The Batesville experience and similar experiences have been repeated countless times across the United States in recent years. Chronic labor shortages have led many companies to invest in machines to do some of the work they can't find people to do. They have also trained their workforce to use advanced technology so they can produce more with less.

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The result was an unexpected productivity boom that helps explain a major economic mystery: How the world's largest economy has managed to stay so healthy, with brisk growth and low unemployment, despite brutally high interest rates intended to curb inflation this is typical to cause a recession?

For economists, strong productivity growth is an almost magical elixir. When companies introduce more efficient machines or technologies, their employees can become more productive: they increase their output per hour. This means that companies can often increase their profits and increase their employees' wages without having to increase prices. Inflation can remain under control.

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, has likened rising productivity to “magic beanstalks for the economy.” … You can have faster income growth, faster wage growth and faster GDP without creating inflation.”

Joe Brusuelas, chief economist at tax and advisory firm RSM, said: “The last time we saw something like this was in the late 1990s.”

At that point, a surge in productivity — an early success of the sudden introduction of laptops, cell phones and the Internet — helped the Federal Reserve keep borrowing rates low as inflation remained under control even as the economy and job market hummed.

This time, the Fed's aggressive series of rate hikes – 11 starting in March 2022 – has managed to cool inflation from a four-decade high of 9.1% to 3.1% while causing little economic hardship.

“I would have said it’s not possible,” said Sal Guatieri, senior economist at BMO Capital Markets. “But that’s exactly what happened.”

A year ago, almost every economist warned that a recession was all but inevitable. Fed Chairman Jerome Powell himself warned in 2022 that overcoming inflation would bring “some pain” in the form of mass layoffs and higher unemployment.

In January, Powell took a different tone. With unemployment barely above its half-century low, the Fed chairman told reporters: “We've had a very strong labor market and inflation has come down.”

However, he warned that the central bank would like to see further progress in slowing inflation. Still, the Fed is so optimistic that inflation is moving toward its 2% target that it hasn't raised rates since July and is expected to cut rates several times this year.

Perhaps the most likely explanation is the increased efficiencies that companies like Batesville Tool & Die have been able to achieve in the last year or so. Before productivity began to grow again last year, the rule of thumb was that average hourly wages could not rise more than 3.5% a year to keep inflation within the Fed's 2% target. That would mean that today's average annual wage growth of about 4% would have to decline. But higher productivity has changed this equation: there is now more scope for high wage growth without triggering inflation.

“Much of the pressure on corporate finances – which normally leads to price increases – was offset by strong productivity growth,” Guatieri said.

At a press conference in February, Powell was asked whether he thought higher productivity explained why the economy had continued to grow steadily despite falling inflation.

“That’s one way to look at it – yes,” Powell replied.

The productivity boom marks a significant shift from the years before the pandemic, when annual productivity growth averaged around a tepid 1.5%, according to RSM calculations. Everything changed as the economy emerged from the 2020 pandemic recession with unexpected strength and companies struggled to rehire the many laid-off workers.

The resulting labor shortage led to an increase in wages. Inflation also soared as factories and ports buckled under the strain of rising consumer orders. There were parts shortages.

Out of desperation, many companies turned to automation. Investments in equipment and in research and development and other forms of intellectual property accelerated. The increase in efficiency began almost a year ago. Labor productivity rose 3.6% annually from April to June last year, 4.9% from July to September and 3.2% from October to December.

At Reata Engineering & Machine Works, “efficiencies were forced upon us,” said CEO Grady Cope. With the job market booming, the Englewood, Colorado-based company couldn't hire fast enough. Meanwhile, its customers were also starting to shy away from paying higher prices.

Grady Cope, CEO of Reata Engineering & Machine Works, holds up a magnet housing for a blood plasma pump on Thursday, Feb. 15, 2024, in Englewood, Colo. At Reata, which makes parts for aircraft and medical device manufacturers, “Efficiency “It was kind of forced on us,” Cope said.

So Reata installed robots and other technologies to produce more with less. With the help of software, the delivery of price offers to customers could be automated. This process used to take two weeks. Now it can be done in 24 hours.

Many economists and business people are confident, if not certain, that the productivity boom can continue. They note that artificial intelligence is just beginning to penetrate factory floors, warehouses, stores and offices.

“At the moment, AI is not a key enabler for us; it is an assistant and accelerator in certain roles,” said Peter Doyle, CEO of Hirsh Precision, which makes parts for the aerospace and medical device industries. “The world is still trying.” “To understand what AI is capable of and how quickly it will evolve.”

Early evidence suggests that AI could sustain productivity gains. A study last year by Erik Brynjolfsson of Stanford University and Danielle Li and Lindsey Raymond of the Massachusetts Institute of Technology examined 5,200 customer service representatives at a Fortune 500 company who used a generative AI-based assistant in 2020 and 2021. The AI ​​tool provided suggestions for dealing with customers and links to useful internal documents.

It was found that those who used the chatbot were 14% more productive than colleagues who did not use the tool. They handled more calls and completed them faster. The largest productivity gains – 34% – came from the least experienced and least skilled workers.

Automation tends to raise fears that machines will replace human workers and thereby eliminate jobs. Some workers who are replaced by robots often have difficulty finding new work and end up having to settle for lower wages.

However, history shows that in the long run, technological improvements actually create more jobs than they destroy. People are needed to build, modernize, repair and operate sophisticated machines. Some laid-off workers are being trained to move into such jobs. And this transition is likely to be made easier this time by the retirement of the large baby boomer generation, leading to labor shortages.

Some of today's productivity gains may be due not only to advanced technology but also to happier workers. The tight labor markets of the past three years have allowed Americans to change jobs and find others that pay better and make them happier and more productive.

One of them was Justin Thompson of Kalamazoo, Michigan, who felt burned out by his job as a police officer with its 16-hour workdays.

“I literally threw myself into the ground,” he said.

Thompson's wife saw a job posting for operations manager at a charter airline. Even with no flying experience, his wife felt he could use the skills he learned as a Marine Corps infantryman — mission logistics — on tours in Iraq and Afghanistan.

She was right. Omni Air International hired him in 2019.

Thompson, 43, said he loves the new job, which allows him to work from home when he's not traveling. And his naval experience – which included developing ways to increase efficiency – has proven invaluable. Technology helps, too: Thompson travels with a laptop, iPad and mobile printer and uses proprietary software to manage logistics.

Other workers have moved from low-skilled jobs to better-paying and more productive jobs.

“The people who rolled tacos on December 31, 2019…yes, they stepped up,” said RSM’s Brusuelas. “They do other things and make a lot more money.”

A holder robot picks up a finished blood pressure pump part from a Mazak Integrex at Reata Engineering and Machine Works on Thursday, Feb. 15, 2024, in Englewood, Colo. Reata, which serves the aerospace and medical device industries, has invested heavily in software that automates its manufacturing processes. The workers were also trained to use more sophisticated equipment.

At Reata Engineering, employees have been trained to use new, sophisticated equipment. A 19-year-old employee, a university engineering student, has used AI tools to make the company's training materials less cumbersome and time-consuming.

“It’s not about laying people off,” said Cope, CEO of Reata Engineering. “It’s about getting people to do more interesting jobs” – and also pay better ones.”