The U.S. economy may be on the cusp of a pickup in productivity that will make it more difficult for Federal Reserve policy makers to reduce unemployment.
After cooling throughout last year, worker output per hour will probably rise at around 1.5 percent, in line with its long- run trend, according to economists like Ellen Zentner and Robert Gordon. That means the lower-than-forecast payroll gains in May and April may be closer to the norm than the exception for the rest of the year as companies redouble efforts to improve efficiency.
Payrolls will grow between 80,000 and 120,000 per month, less than this year’s 165,000 average, even as the economy expands by about the same 2 percent, estimates Zentner, a senior economist at Nomura Securities International Inc. Fed Chairman Ben S. Bernanke earlier this year aired his concern that hiring will subside without faster economic growth.
“As the rate of productivity normalizes, businesses won’t need to hire as many workers,” said New York-based Zentner. “The level of job growth we’ve been getting over the past few months is probably pretty normal.”
The Fed said today it will expand its program to replace short-term bonds with longer-term debt by $267 billion through the end of the year in a bid to reduce unemployment and protect the expansion.
The continuation of Operation Twist “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said in a statement at the conclusion of a two- day meeting in Washington.
Stocks fell after the Fed reduced its estimates for growth. The Standard & Poor’s 500 Index dropped 0.2 percent to 1,355.69 at the close in New York.
Elsewhere today, the Monetary Policy Committee of the Bank of England voted to keep its bond-buying target at 325 billion pounds ($511 billion). The 5-4 decision put BOE Governor Mervyn King, who sought to boost stimulus as jobless claims rise and the risk from Europe’s debt crisis grows, in the minority for the first time since 2009.
Japan reported its first trade deficit with the European Union since the Finance Ministry began tracking data in 1979 as the debt crisis limited a rebound in Japanese exports.
Employers in the U.S. added 69,000 workers to payrolls in May, the least in a year, lowering the average pace of job creation in 2012 to about 165,000, figures from the Labor Department show. Zentner projected a 95,000 increase, the second-lowest in a Bloomberg News survey of 87 economists, after taking into account a rebound in productivity.
The jobless rate last month climbed to 8.2 percent from April’s 8.1 percent. It has held above 8 percent for 40 consecutive months, the longest stretch of such elevated levels in the post-World War II era.
An uptick in efficiency would mark a reversal from last year and early 2011, when companies expanded payrolls even as economic growth cooled. Worker output per hour rose 0.4 percent in the year to March, compared with an average 2.5 percent gain in the six-year expansion that ended in December 2007.
Labor costs adjusted for productivity rose 1.8 percent in 2011, the most in three years.
The slowdown in productivity and increase in expenses occurred as companies brought headcounts in line with demand, correcting over-aggressive firings during the 2007-2009 recession, Gordon, a professor at Northwestern University in Evanston, Illinois, who’s researched the ebb and flow of U.S. productivity, said in an e-mail.
Productivity growth will return to a trend of 1.2 percent to 1.4 percent per year, which means job creation will be slower for any given pace of economic growth in the next year or two compared with 2010 or 2011, projected Gordon, also a member of the National Bureau of Economic Research committee that determines when recessions begin and end.
His view echoes comments Bernanke made earlier this year during a speech that explored the reasons behind last year’s drop in unemployment. At the time of his speech, average job growth in the six months through February had been the strongest in almost six years. Meanwhile, gross domestic product had advanced 1.7 percent in 2011, almost half the pace of 2010.
“What we may be seeing now is the flip side of the fear- driven layoffs that occurred during the worst part of the recession, as firms have become sufficiently confident to move their workforces into closer alignment with the expected demand for their products,” Bernanke said before the National Association for Business Economics on March 26.
“To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and business, a process that can be supported by continued accommodative policies,” he said.
Companies will probably strive for bigger gains in efficiency to maintain profit growth, which has slowed in recent months, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Corporate profits rose 6.5 percent in the first quarter from the same time in 2011, the smallest year- to-year gain since the recession ended in mid-2009, Commerce Department data show.
“We had some slow productivity over the past few quarters, which for a while meant greater hiring, but that has apparently pressured margins and profits to the extent where now companies are starting to pull back,” Feroli said. The slowdown in employment and capital spending suggests a move “a little bit toward more caution,” he said.
Oracle Corp. (ORCL:US) wrapped up the bulk of its plans to enlarge its sales force in the past fiscal year and will focus on making those new workers more productive, Mark Hurd, co-president of the world’s second-largest software maker, said during a June 18 earnings call.
“We are working to increase the productivity as we assimilate those people into the organization this year,” Hurd said. “We will still have adds in fiscal year 2013, but most of the hard work was done” a year earlier.
While the productivity gains will reduce the need for labor in the short term, they will help create jobs in the future by enlarging the economy’s potential for growth, said Dean Maki, New York-based chief U.S. economist at Barclays Plc and a former Fed economist.
“The old saying is a steam shovel replaces a hundred men digging with spoons,” Maki said. “You wouldn’t want to go back to a hundred men digging with spoons just to increase job growth.”
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