Private Sector Productivity Fell In 2016 - Worst Since 2009
1. US Private Sector Productivity Actually Declined Last Year
2. Sluggish Productivity Growth is Now a Worldwide Trend
3. “Robo-Advisors” – What Are They & Do You Need Them?
One key measure of US economic productivity actually declined in 2016 for the first time since the depths of the Great Recession in 2009. The amount of goods and services produced, versus the total inputs of labor and capital to produce them, declined slightly last year for the first time in seven years. We’ll look at the reasons why below.
This troubling trend is not limited to the United States. In fact, the latest drop in US productivity is part of a recent worldwide trend of sluggish productivity growth among rich countries, and economists are still not sure why it’s happening. We will explore the prevailing theories for why this is happening as we go along today.
The debate over how to increase productivity, and increase living standards, is currently focused on the development of robots. There is a great deal of uncertainty (and fear) about the growing trend towards the use of robots to perform human tasks. I will speak to these concerns and argue that we should not fear the trend towards robotics.
Finally, I will also address the issue of “Robo-Advisors” and whether or not they make sense for most investors. In my view, they do not. I’ll give you my reasons in today’s E-Letter. Finally, a recorded version of the webinar we had last Thursday with Alpha Advantage and its Portfolio Manager Paul Montgomery is now available. If you were not able to attend the live webinar, you don’t want to miss your chance to watch it now. That’s a lot to cover, so let’s get started.
US Private Sector Productivity Actually Declined Last Year
The Labor Department reported last Thursday that US private sector productivity – the amount of goods or services produced, versus the total inputs of labor and capital to produce them – declined 0.2% in 2016 for the first time since the depths of the Great Recession in 2009.
The so-called Multifactor Productivity Index for 2016 reflected a 1.7% increase in total output last year but with a 1.9% increase in the combined inputs of labor and capital, for a net productivity decrease of 0.2%. This key measure of productivity differs from the more commonly watched worker productivity per hour index, but is still very important.
Here’s why. On March 8, the Labor Department reported that US worker productivity, or average output per hour, increased a modest 1.0% in 2016. Yet the Multifactor Productivity Index of output versus input decreased 0.2% at the same time.
What this means in simple terms is that US workers produced more goods and services but did so less efficiently. Or put differently, this means that it took more workers to produce the same amount of goods as the year before.
Here’s another way to think about it. Our anemic GDP growth of only 1.6% in 2016 was largely caused by companies hiring more people and buying more machines and software, not by improvements in technology or organization that allows companies to squeeze more out of the resources they already have.