Productivity soars 2.5%, but caution flags up
Advertiser News Services
U.S. companies posted some of the strongest productivity gains in months yesterday, but mounting layoffs are beginning to stoke fears that companies are cutting so deeply into their work forces that they will have trouble bouncing back when the economy turns around.
Bloomberg News Service
With fresh memories of the tight labor market of the late 1990s and the unemployment rate holding at 4.5 percent, most companies are resorting to job cuts only after slashing other expenses.
The cars of the roller coaster on California Screamin' are upside down as they turn on Mickey Mouse's face at Disney's California Adventure theme park in Anaheim. In March, Disney joined the ranks of several other companies in announcing layoffs. The company said it will cut 4,000 jobs to save up to $400 million in annual operating expenses.
But already there are signs that layoffs have hurt production orders and customer service at some companies.
Yet as the red ink continues to rise, the pink slips are flowing. Job-cut announcements, led by the telecommunications and computer-industry sectors, hit a new high last month. According to one survey, nearly a million job cuts have been announced so far this year.
In the telecommunications sector alone, companies have announced plans to shed at least 175,000 jobs so far this year, including almost 39,000 at Lucent Technologies, 20,000 at LM Ericsson and 15,000 at Alcatel, according to a monthly survey by Chicago outplacement firm Challenger, Gray & Christmas.
Computer companies have said they plan to cut 101,000 jobs this year. Automotive companies have announced 91,800 planned cuts, and the electronics and industrial sectors have said they intend to shed about 162,000 jobs. Other sectors have not been immune, with Walt Disney Co. and CSX among those also announcing thousands of job cuts.
In large part, the strong productivity numbers for the April-June period resulted from companies laying off workers and cutting work hours to bring their labor costs into line with sluggish demand for their goods.
But firms were able to increase overall national production slightly even with reduced work forces — and the higher productivity figure was contrary to the usual pattern for recessions and slowdowns, when productivity growth typically turns negative. That is providing potent ammunition for those who believe the U.S. economy has entered a new era in which technology and a more flexible labor market is making American companies more productive than before.
The Bureau of Labor Statistics reported that productivity — which measures output per hour worked — grew at an unexpectedly strong 2.5 percent rate in the second quarter, compared with a revised 0.1 percent rate in the previous quarter.
Revised figures for 1998-2000 showed that productivity rose at an annual rate of 2.6 percent during that period. That is a bit lower than the 3.2 percent annual rate originally estimated, but it is still well above the pace recorded during most of the 1970s, 1980s and early 1990s. And it is robust enough to ease the concerns, voiced by some "new economy" skeptics, that the productivity gains of recent years were illusory.
"If you believed before that there was some fundamental change in the way the economy functions, you should believe it still," said Neal Soss, an economist with Credit Suisse First Boston in New York.
The question of whether productivity shifted into higher gear in the late 1990s has been a hotly-contested and important one for economists and policymakers.
With higher productivity, living standards can rise more rapidly, because firms can offer their workers more generous wage increases without worrying so much about higher costs, because increased output offsets increased wage bills.
Even with rising productivity, the so-called new economy remains vulnerable to ups and downs, as has been apparent during the recent months of extremely weak economic growth, layoffs, falling profits and sagging stocks.
But productivity gains can translate over the long-term into higher rates of economic expansion without inflation.
That, in turn, has major implications for the Federal Reserve's interest rate policy. Fed chairman Alan Greenspan, who believes that advances in technology have greatly enhanced U.S. corporate efficiency in recent years, has cited this phenomenon as a major justification for the central bank's low interest rate policy.
The theory is that because companies' productivity is greater, they needn't raise prices as much to cover increased labor costs, so the danger of rekindled inflation has receded.
Productivity numbers are notoriously subject to computational problems, and some analysts and policymakers have voiced doubts about whether increased productivity growth represents a solid trend or is merely a statistical blip that will prove ephemeral. Yesterday's figures bolstered the believers rather than the doubters.
Recessions and slowdowns normally cause productivity to decline because output falls even faster than companies cut their payrolls.
But the 2.5 percent rise for the second quarter, which applied to nonfarm businesses, was not only positive; it was a full percentage point higher than most economists had forecast.
Moreover, the original estimate of productivity growth for the first quarter, was revised from a 1.2 percent decline to a 0.1 percent gain, noted Brian Jones, an economist at Salomon Smith Barney. "So even the one observation (the skeptics) had to hang their hat on doesn't exist anymore."
Layoffs and cutbacks in work hours were a big part of the story, as the total number of hours worked fell 2.4 percent in the second quarter. To some extent, that reflected companies letting go temporary workers that they had hired during boom times, although temporary workers are far from the only ones affected.
"It's across the board — it's layoffs, downsizing, sabbaticals — it's every which way a company can do to reduce its work force after eight years of bloating itself," said Jeffrey Joerres, president of Manpower Inc., a temporary employment services company.
Still, the economy is producing more output over the past several quarters despite the reduction in hours worked, because productivity growth is increasing.
"That's not the normal response you get in the kind of slowdown that we've gone through," noted Jones of Salomon Smith Barney.
The 2.6 percent trend growth in productivity for 1998-2000, he added, implies that the economy can now grow at about 3.5 percent a year without generating inflationary pressure, once the 1 percent annual growth in the labor force is added to productivity.
"That's well above what a lot of prior estimates had been" of the economy's potential growth, Jones said.
But some analysts warned that the figures released yesterday don't bear out the most optimistic claims about the new economy.
"It certainly is good news for those who believed we have structurally changed productivity growth," said Diane Swonk, chief economist at Bank One in Chicago. "And it supports Greenspan's continual optimism" about the subject.
But even so, she said, the figures do not support the view, espoused by some new economy enthusiasts, that the economy now has a long-term potential growth rate of 4 percent to 4 1/2 percent.
"It's probably closer to 3 percent to 3 1/2 percent," Swonk said.
