Productivity is Down… Surprised?

Today’s headlines are bemoaning the sudden and unexpected drop in U.S. productivity after an exceptional run of increases in recent quarters. Why are they surprised? The increases in productivity were, in many cases, the result of fewer people working harder. Companies aggressively reduced the workforce as business declined, but have been slow to re-hire as sales have improved over the last six or eight months. Fewer people producing more goods and services equals increased productivity.

But the higher productivity levels were and are unsustainable. When a company reaches the point where the existing workforce just can’t keep up with increasing demand, they hire more workers. New people (or re-hired past employees) cannot, and shouldn’t be expected to, produce at the same rate as the overworked survivors that remained after the layoffs. We are getting back to more reasonable expectations as far as sustainable worker output levels.

In other words, the productivity increase we’ve seen over the past year or so was artificially inflated because of a general feeling of uncertainty that the recovery would have ‘legs’. Companies are understandably reluctant to commit to new employees if they are not confident that demand will continue to increase.

Productivity will continue to be higher than it was a year or two ago. We are not going back to the levels that were in existence before the recession and recovery. Those quarter-after-quarter increases will mostly remain after the dust settles on all of this. Just as the stock market doesn’t go straight up or straight down, there are healthy pullbacks from time to time. Look at any stock chart or index. I believe what we are seeing in this quarterly productivity measure is just such a pullback.