Unemployment and Productivity

Reported today by Bloomberg News:  “Worker productivity surged at the fastest pace in six years, labor costs fell and unemployment claims were lower than forecast, signaling companies might be preparing to start hiring again after cutting costs to the bone.”  (See story at www.AustinMarketInfo.com.) 

This is the way the business cycle is supposed to work:  Employers reduce costs during the downturn, then restrict hiring until revenue growth and production requirements justify expanding payroll costs.  During the 3rd quarter of 2009 U.S. GDP grew 3.5%, while 768,000 jobs were cut.  Simple arithmetic:  more output by fewer workers = greater productivity.

Typically, as the business cycle enters a new growth phase, capital investment can help to hold some of those production gains.  That may well be the case this time.  The key question now is:  Are we really seeing economic growth?  GDP consists of Consumption (consumer spending), Investment (capital investment in plant and equipment), and Government Spending.  Virtually all of the GDP growth in 3Q ’09 was Government Spending.  Most businesses have not committed significant capital to new investments, and consumer spending is very soft, and expected to remain low at least through the end of the year.

This is not to debate whether government spending during a recession is good or bad.  Without any value judgement or political bias, the fact is that employment growth in the private sector will raise personal income, which will lead to increased consumer spending, which will in turn give businesses the confidence to make long-term investments in growing capacity.

The economic indicators discussed in this Bloomberg article and others are indeed encouraging.  I wrote about this just a couple of days ago, and I believe that this downturn probably has bottomed.  On the other hand, the official U.S. unemployment rate was reported today at 10.2% — the highest since 1983.  That is not a good sign for consumer spending or the capital investment that would follow.    But things will get better!

Warren Buffett advises (to paraphrase) — invest in what you know.  He is confident enough to be buying companies over the past several months.  He knows that opportunities exist in down markets for people who recognize and act on them.  Don’t just hunker down and hope this gets better.  Find something you know and can manage and make your own opportunities.  That is what will bring this recession to an end.