Financial Crisis Creates Productivity Bonanza? No.

Posted by: Michael Mandel on November 05

This morning’s productivity numbers showed a huge gain in output per hour in the third quarter—up at an annual rate of 9.5% in the nonfarm business sector.

But here’s something else. If we are to believe these numbers, the biggest financial crisis since the Great Depression has actually produced a productivity gain of 5.1% since the downturn started in the fourth quarter of 2007.

If you think that productivity has risen by 5.1% during the financial crisis, I’ve got a subprime bond to sell you.

Book1_23268_image001.gif


Let me get this straight. We have a collapse of the housing and construction sector, massive layoffs in almost every part of the economy, a sharp downturn in consumer spending, and bank failures on an astonishing scale—-and the numbers show an increase in productivity?

It defies common sense.

I suggest two reasons why the numbers are off. First, as in my recent cover, companies are cutting educated workers such as scientists and engineers who are not directly involved in the immediate production process. This means a drop in important but unmeasured intangible investments in R&D, product development, training, and advertising, which are not getting picked up by the GDP statistics.

Second, and this is relevant to the DC conference mentioned in the previous post, the statistics are being greatly distorted by globalization. Let’s take a look at the computer purchases and supply, as reported by BEA.

According to the BEA’s number, final sales of U.S.-produced computers has *risen* by 3.9% since 07IV, while imports of computers have *fallen* by 1.5%. Over the same stretch, employment in the computer industry has fallen by 12.5%. Being incredibly simple-minded, that would suggest that productivity in the U.S. computer industry has risen by about 19% in the downturn. Not bad, if true!

But there’s a problem. According to the BEA’s stats, the price of imported computers has fallen by 9.6% since the end of 2007, while the price of computers to consumers has fallen by 22.2%.

That doesn’t make sense. It’s far more likely, as I argued here, that the import price stats are mismeasured.

If we assume that import computer prices really fell at the same rate as domestic consumption, that would mean import growth is really faster, and domestic output growth is slower, as is productivity growth. By my back of the envelope calculation, the effect on computer industry productivity growth is potentially huge (I’ll give the details later after I have had a chance to check them). This sort of calculation extends to the rest of the economy, though less dramatically.

So for these two reasons, I am quite skeptical of the proposition that the financial crisis has increased output per hour.

TrackBack URL for this entry: http://blogs.businessweek.com/mt/mt-tb.cgi/

Reader Comments

Marc

November 5, 2009 02:07 PM

When I studied statistics I was taught that they could be manipulated to show pretty much whatever you wanted them to show. Here's a perfect case in point.
Things are bad, maybe getting less bad, or doing so more slowly, but as long as people are struggling to make ends meet, or can't make ends meet, these other numbers mean little or nothing.
We have lost much of the manufacturing base that has been America, and it might never come back. That's all that really matters, not these numbers Ask the former workers.

Doug

November 5, 2009 05:07 PM

Productivity was improved by semiconductors in the 70's, personal computers in the 80's and the Internet in the 90's. No big technological developments in the past ten years. More resources need to be devoted to research and development, otherwise our standard of living will stagnate or even fall.

CompEng

November 5, 2009 05:19 PM

This seems to indicate that trade is not currently "re-balancing" in existing sectors. I don't see a way for the US service surplus to grow to counter this trend in the short term. Unless there has been a significant reduction in trade relative to US production, this implies many in the US are still in the process of getting poorer today, and no forces are emerging to change that trend.

The fight for jobs continues: much more entrepreneurship will be needed (and no more casino industries, thank you very much).

LAO

November 5, 2009 06:33 PM

Somebody tell me where there is a U.S. employee producing computers. I thought Dell was the last hold-out -- after long employing domestic final assembly of imported sub-assemblies, didn't their financial woes force them to abandon the scheme?

Dan in Rockville, MD

November 5, 2009 07:55 PM

Sure productivity shoots up. The unproductive employees and companies are knocked out of the economy and then you measure what is left.

It makes perfect sense and it is why free markets work.

The benefit of productivity is that prices have stayed low for everyone, keeping a lot of household budgets from falling apart.

Doug

November 5, 2009 10:28 PM

"This means a drop in important but unmeasured intangible investments in R&D, product development, training, and advertising"

That is not cutting fat, that is cutting muscle (or brain tissue). This is terrible news.

AJay

November 6, 2009 02:18 AM

Dan hit it on the head, this is exactly the result you'd expect if the free market is working right. Productivity spikes up, even though overall output growth slowed, because the weaker firms are washed out in a recession. This is exactly the benefit of a recession, just as the benefit of a boom is that people invest in wild ideas they wouldn't otherwise invest in. Until you have an actual argument to make about what data is wrongly counted, Mike, no reason why this data is any more inaccurate than other numbers you like to cite. ;) Doug, there's nothing intrinsic about R&D, product development, training, and especially advertising that there can't be plenty of fat there. There's fat across all functional groups of a company, nothing special about those. Of course, many companies make mistakes and cut muscle with fat but what matters is the discipline of cutting, better to cut some muscle than not cut at all. The firms that do better at cutting fat and leaving the muscle be will thrive in the coming years, their reward for being able to tell the difference. :)

Mike Mandel

November 6, 2009 07:08 AM

Where is the income growth? If productivity is up since the end of 2007, then it must be showing up in real income growth somewhere. Real compensation per hour is flat, and I'm sure that real profits are down.

Frankly, I don't see it.

Ajay

November 6, 2009 08:34 AM

There are a myriad places it can be sucked out before it shows up in real income growth. For example, health benefits as I've repeatedly said before, where inflation continues to grow by leaps and bounds. Also, I wouldn't be so sure that real profits are down, companies have been turning in surprising quarterly profit numbers recently.

erichwwk

November 6, 2009 09:47 AM

Dan (in Rockville) and Ajay:

You are kidding, Right

Since when is the value of the marginal product of more importance than the value of the aggregate product?

By THAT logic, the monopolistic practice driving up market (marginal) price decreasing output makes society better off???

Try goinf back a few hundred years and read Ricardo again about the difference between price and value.

Viking

November 6, 2009 12:50 PM

I agree with Ajay and Dan.Health care costs have been growing by leaps and bounds,so should be counted as income growth,to the extend those costs are covered by employers.It seems common sense to me that all fringe benefits,should be counted as income,so to the extend they increase,they should be counted as income growth.

Mike Mandel

November 6, 2009 02:07 PM

The real compensation figures include healthcare benefits, so pointing to healthcare doesn't help explain where the income has gone.

Kartik

November 7, 2009 05:51 AM

If an electronic device is available for $100 in 2007, but falls to $50 in 2009, in accordance with Moore's Law and other factors, didn't that get captured in Productivity stats?

As technological products with inherent deflation broaden to more and more parts of the economy, wouldn't productivity continue to rise?

Let me put it another way : In 2003, a 42-inch Plasma TV cost 500 hours of the median wage. In 2009, the same thing costs just 50 hours of the median wage. So purchasing power, as measured in 42-inch plasma TVs, increased 10X.

Of couse, technological products are only a tiny portion of consumer spending (2% maybe), but that 2% is experiencing a productivity rise of 59% a year.

Kartik

November 7, 2009 05:56 AM

Nominal income is flat.

Healthcare and gasoline prices are rising.

But all technological products are continually falling in price, or otherwise delivering more per dollar.

New products that didn't exist 3 years ago are falling in price.

The Wii dropped from $350 to $200
The Kindle dropped from $400 to $260
The iPhone dropped from $600 to $200
A 22-inch LCD monitor has dropped from $400 to $200

The technological Moore's Law deflation has a direct and rapid impact on increasing purchasing power, offseting healthcare and oil inflation.

Ajay

November 7, 2009 08:08 AM

Erich, you must be kidding if you think anybody's talking about marginal products or nominal values. I suggest you read what people are writing rather than bringing up your unrelated hobbyhorse of monopolies and price vs value, which have nothing to do with this discussion.

Mike, considering your previous income figures didn't include health benefits, who knows what income figures you're referring to now: feel free to cite your source. One has to really plunge into the data to figure this stuff out, handwaving without even naming your data sources is a waste of time. Suffice to say, I doubt there's any real puzzle here.

Brandon W

November 7, 2009 05:39 PM

Kartik,
That kind of assumes people want to buy those things. Not everyone does. I don't own a Wii (or any other gaming system), or an iPhone, or a Kindle, and I just finally broke down and bought an HDTV about 3 months ago. It's only an advantage to everyone if everyone buys one. And certainly, a lot of people neither need nor want all the gadgets.

Kartik

November 7, 2009 11:07 PM

Brandon W,

But you certainly own PCs, a cellphone, a router, a digital camera, and your car has about $4000 of electronics in it.

The average house has 10-15 such deflationary electronic items. There is no escaping them unless you live in a log cabin in the woods.

Antonin Rusek

November 8, 2009 05:12 PM

Just a question to Michael (And I do not know the answer):
Is it possible that the reported increase in the productivity (for the US economy overall) is just the consequence of the change of the output composition in recession?
(I.e. if the share of the high productivity sectors in the reported GDP increases relative to low productivity sectors, the reported overall productivity (which should be a weighted average of sectoral productivities) will increase, even if sectoral productivities remain unchanged - or even (hypothetically) decline.

Econguy

November 8, 2009 05:46 PM

Thanks again for calling flawed data systems into question. This has been a problem for a long time and it needs to be outed. Also, the reason the public is not going to get this or any other fleshing out of the data systems by university economists is that they are too busy getting peer reviewed papers out the door (with promotions)to call any data into question.

erichwwk

November 9, 2009 04:30 PM

perhaps this effort to address the import measuring problem is old news?

http://www.nytimes.com/2009/11/09/business/economy/09econ.html]

It seems we are going full circle.

Kenneth Boulding pointed out years ago the problems with using flows to measure changes in the "state of things". With perfect accounting, the two would be identical, but the problem w/ imports seems to me to just be one of the most glaring, and perhaps just scratching the surface in trying to account "along the way" rather than "after the dust settles".

One of his favorite examples was counting in GDP the value of cigarettes produced, and then adding to that the dollar value of medical services that gets us to the state of well being we previously held.

I am curious how folks would measure the activity in these cases here:

http://picasaweb.google.com/erichwwk/ECONOMICS#

a) satisfying demand by substituting a market good for a non-market good, and b) shifting from production of consumer products to nuclear weapons.

and what conclusions they would draw.

Hey, Ajay didn't intend to ruffle feathers. ;-) B

In terms of health care, I would be interested in being steered to work that measures the relationship between health expenditures and well being, especially for pharmaceuticals.

Just my $0.02 worth.

Brandon W

November 9, 2009 06:14 PM

"...counting in GDP the value of cigarettes produced, and then adding to that the dollar value of medical services that gets us to the state of well being we previously held."

I've used a similar point before. If 16% of our GDP is health care, but 10% of our production (GDP) causes half the problems (and as someone who studies health & nutrition, this isn't a far-fetched number)... then we could eliminate the harm-causing production, cut health care spending in half, and have an 18% drop in GDP. Catastrophic as far as economic numbers go.... but the result would be happier, healthier people.

etootoo002

March 21, 2010 02:16 AM

http://www.etootoo.com

Thank you support of numerous clients
customers to buy the corresponding product on this site, both
a gift, so stay tuned! !

(I)Our Company is Online store, and we alawys offer top quality sport

shoes, famous brand shoes and sportswear at good price.

(II) In the past 6 years, we have sent great many products to the

customers in USA, Europe, ASIA and other area, also we have lots of

experience in dealing with online business oversea

(III) Generally, Goods are delivered in fast and safety way Of course,

shoes and clothing will be packaged in original box with tags
http://www.etootoo.com

HOT SELL Product Brand is below:
UGG BOOT ,nike shoes,air jordan shoes,nike shox shoes,gucci shoes ,true

religion jeans, ed hardy jeans,coogi jeans,affliction jeans, Laguna

Beach Jeans,ed hardy T-shirts,Coogi T-shirts,Christian Audigier T-

shirts,Gucci T-shirts,Polo T-shirts,coach handbag,gucci handbag,prada

handbag,chanel handbag .
our price:
CA POLO EDHARDY GUCCI T-SHIRT $15;
TRUE RELIGION EVISU G-STAR COOGI JEAN $36;
AIR MAX NIKE SHOX JORDAN JORDAN FUNSHION JORDAN RING SHOES $35;
GUCCI COACH shoes DG shoes $33
coach chanel gucci LV handbags $32;
edhardy New Era POLO cap $15;
coach okely prada nike DG Sunglass $16;
free shipping

http://www.etootoo.com

the Duke

April 21, 2010 04:14 PM

Math wizards challenge Fibonacci level for retracement 89% just reached for the NASDAQ. Is this science or psychological barrier. Hold on to your money....

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

BW Mall - Sponsored Links

Buy a link now!