Will Rapid Productivity Growth Lead to Profitable Expansion?

With all the doom and gloom in the markets today (SP500 dropped 3.1%), it's easy to think that the global economic recovery is about to turn into a double dip recession. After all the jobless claims came in higher then expected at 480K and surely that means growth has stalled? Possibly but Brian Westbury - Chief Economist at First Trust - has a different twist on the numbers reported today. Specifically that the productivity numbers are not only making companies more profitable but those profits are going to lead to expansion and more hours worked.

Clearly the job creation spiget hasn't been turned on yet, but we're on the tip of the iceberg as corporate profits are soaring. Job growth likely depends on whether the government will get out of the way or instead force the US to crash into the iceberg. Last night Cisco (CSCO) talked about boom times ahead with record profits and the hiring of 2-3K employees in the next few quarters. The market wants to move a head and it clearly needs to hire more people in order to move forward, but it needs less rhetoric from the Obama Administration and more support for job creation. Otherwise, don't be surprised when CSCO announces that those jobs are going to Asia instead of the US.


Implications of Productivity Growth:

You have to go back to the mid-1960s to find three
straight quarters where productivity – output per hour worked – has
boomed as rapidly as it did in Q2-Q4 of 2009. While many focus on
the fact hours worked declined during the early (Q2 and Q3) part of
this boom, this was not the case in the latest quarter. Output grew at a
7.2% annual rate in Q4, while the number of hours worked grew at a
1.0% annual rate. Contrary to popular belief, this surge in productivity
does not mean that employment must grow slowly. Rapid productivity
growth and falling unit labor costs mean it is getting more and more
profitable for companies to expand operations and boost hours
worked. In the past year alone, unit labor costs – labor compensation
per unit of output – fell 2.8%, the largest drop since 2002. This will
put upward pressure on labor demand, leading to net job creation very
soon. It is clear, however, that the labor market will not return to its
late 1990s or mid-2000s vibrancy (with unemployment rates below
5%) as long as the burdens of government remain as large as they are
today. As an exclamation point on this fact, new claims for
unemployment insurance increased 8,000 last week to 480,000. The
four-week moving average rose to 469,000. We still expect a small
increase in employment to show up in tomorrow’s January employment report.