As productivity gains picked up between the late 1990s and early 2000s, Greenspan recognized accelerating worker efficiency would contain inflation even as the economy strengthened and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999.
In the meantime, the slowdown in efficiency need not be all bad. As companies reach the limit of how much they can wring from current employees, they’ll need to add workers as orders improve, economists including Feroli said.
“We’re at the edge,” said Richard Moody, chief economist at Regions Financial Corp. in Birmingham, Alabama. “There’s not a whole lot of latitude for firms to meet orders with their existing workers. Once we see faster demand, that’s going to spur an increase in hiring.”
The gains in employment aren’t expected immediately, nor will businesses go all out to take on more staff, Moody said. The economy has to first cope with the fiscal tightening that is projected to curb growth this quarter, and as the drag fades, demand may pick up toward the end of the year and into 2014, inducing a healthier job market.
3M Co., the maker of products ranging from Scotch tape to dental braces, is among companies trying to wring out more productivity by controlling expenses. The St. Paul, Minnesota-based company cut its annual earnings forecast after quarterly profit trailed estimates amid a slowing global economy.
“We’ve been managing costs quite cautiously through last year, through the first quarter,” David Meline, chief financial officer, said on an April 25 earnings call. “We’re in a position now where we’ll continue to do that until such time that we see our growth picking up more strongly, which would support incremental investments in certain areas.”
Wage gains will be harder to come by as firms restrain costs, though it also indicates inflationary pressures from labor expenses will be contained, said Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut.
Productivity has slowed to a “crawl,” he said. “It’ll be tough to generate income gains in this environment.”
In the first period of increased productivity growth since World War II, from 1947 through 1972, worker efficiency grew at a 2.8% annualized rate, Berger said. That meant the level of productivity could double every 20 years to 25 years, so an American worker in the early 1970s could generate twice as much output in an hour as his predecessor did in the late 1940s, he said. Those gains would be reflected in better pay and a higher standard of living.
Without a new driver of efficiency akin to the high-tech boom, the 0.7% rate of productivity over the past three years means it will take the U.S. about 94 years to achieve the same feat.
“Hopefully we’ll find ‘the next big thing’ before then,” Berger said.