Changing business cycle?
Posted by ecoshift on September 8, 2008
Interesting read from WSJ below. Seems like we’ve managed to delink broad economic benefits from corporate economic performance. As you think through the implications of rising productivity and shrinking incomes it would be worth reviewing this post on a study from the Upjohn Institute for Employment Research – Outsourcing, Offshoring and Productivity Measurement in U.S. Manufacturing: Manufacturing Productivity Growth… Numbers Are Inflated By… Offshore Outsourcing
Mixed Economic Data Show A Changing Business Cycle – WSJ.com
By JON HILSENRATH and KELLY EVANS
September 8, 2008; Page A2
The U.S. economy looks like it is traveling along two tracks.
If you look at output — the amount of goods and services Americans produce — the economy has been rising at a decent clip. But people aren’t feeling it in their wallets because the factors driving their own incomes — such as jobs and wages — are under strain.
The point has been underscored by a slew of economic reports released in the past few weeks. The government’s measure of inflation-adjusted gross domestic product expanded at a surprisingly robust 3.3% annual rate in the second quarter. Exports were a big driver, in particular exports of industrial supplies and capital goods.
Yet employment has fallen for eight straight months by a cumulative 605,000 jobs. More than half of the losses have been in manufacturing. You might expect manufacturing employment to hold up better during an export boom. But it isn’t.
With job losses mounting, companies are cutting back on hours and getting tough on wages. Year-to-year personal income growth has slowed from more than 7% a couple of years ago to a little more than 4% in July, not enough to keep up with inflation.
In theory, output and income should go up and down together. If the economy is still expanding, why are so many households being squeezed?
One answer is that the business cycle itself is changing. Recessions in the past used to follow a predictable script. Business would slow or inventories would go up too much and catch companies flat-footed. As their own productivity dropped, they would belatedly respond by cutting back on workers. Then, as the process fed on itself, everything would go down together — output, employment, income and productivity.
The 2001 recession changed the script — productivity held up surprisingly well throughout. Companies cut back ahead of the business slowdown and kept doing it even after demand started rising again. The productivity they managed to squeeze out of existing workers bolstered output, even as it strained households.
The same thing seems to be happening again: To the surprise of many economists, worker productivity is rising, not falling.
“There seems to be a change in how businesses operate,” says Dean Maki, economist for Barclays Capital. With better technology, businesses get ahead of inventory buildups or demand slowdowns more quickly. The declining influence of unions is also putting management in a position to fire workers more quickly.
The result: While incomes are getting squeezed, the output per hour of workers was up at an annual rate of more than 3% in the first half of the year.
More than ever, it seems, this puts the brunt of a downturn on workers. But there are important upsides to the shift. Better productivity helps bolster corporate profits, so while the stock market is weak it hasn’t collapsed as have stock markets elsewhere in the world this year. It also helps restrain inflation and give the Federal Reserve leeway to keep interest rates low and help the economy heal.
It also makes it harder to read a business cycle. The collection of economists at the National Bureau of Economic Research who date recessions debated for months about the beginning and end of the last downturn because of the striking disconnect between output and income.
“If you dated it based on the labor market you’d have it be one of the longest recessions in history, and that didn’t feel right,” says Christina Romer, an economics professor at the University of California, Berkeley. The group finally decided November 2001 — when output growth restarted — was the point at which the recession ended, making the eight-month slowdown one of the shortest on record…