Dangerously productive

Jobs and productivity: Surging productivity ought to be good for the US economy. But it could actually signal further job losses. The unemployment rate rose to 10.2 per cent in October in spite of a growing economy. Meanwhile, productivity surged at an annualised pace of 9.5 per cent in the third quarter. That’s normal in recoveries, but it began early - while GDP was still declining - and may continue. If so, jobs may be slow to return and unemployment could reach a record, weakening banks and depressing wages.

Productivity growth is normally considered good news. It allows more goods and services to be produced with less labour input. However, the rise in productivity common in the early stages of economic recovery typically reflects manufacturers and service providers increasing output without hiring more staff. The usual impact is that the unemployment rate continues to rise even as output recovers.

This time around, rapid productivity growth began even before economic growth, with the indicator showing 6.9 per cent annualised growth in the second quarter. One contributing factor could be current global ultra-low interest rates, which encourage substitution of capital for labour and relocation of production to emerging markets whose capital cost disadvantage is temporarily suppressed.

If rapid productivity growth, having started earlier than usual, also continues for longer than usual, then even continued economic growth could coincide with a further rise in unemployment. Uncharted territory isn't so far away: the post-war peak unemployment rate in November 1982 was 10.8 per cent. Already the recent recession has claimed 7.3 million jobs, far more than any other since the 1930s.

As far as the potential impact on consumer-focused banks is concerned, the “worst case” unemployment rate considered in the bank stress tests conducted by US regulators earlier this year was 10.5 per cent. It's true that housing prices appear to have stabilised above the “worst case” stress test level. But post-war record unemployment would cause further bank losses, particularly in credit cards, thereby slowing or reversing any recovery in the banking sector. In spite of modern safety nets, a long period of double-digit unemployment would also exert downward pressure on real wages - depressing US living standards, particularly for blue-collar workers. The kind of productivity growth that accompanies a jobless recovery isn't as welcome as it seems.