American employers have been hiring more and selling less during the past three years of putative recovery. That’s why they stopped hiring in April and May, when the US economy added fewer jobs than at any time since the Great Recession. Economists point to the lowest productivity growth since the 1970s, but a simpler measure of productivity–sales per employee–has declined in most sectors of the economy during the past three years. That is a really dismal result, and points to little or no economic growth for the next couple of years, and significant risk of a US recession.
It isn’t just that the US economy added only 38,000 jobs in May (and just 83,000 in April after a downward revision of the earlier jobs report). Almost a million workers left the labor force (presumably because they couldn’t find jobs) or shifted from full-time to part-time work because they couldn’t find full-time work. Rarely do three melons come up together in the data release, which makes it look less like a blip than a blowup.
The chart below shows sales per employee of major S&P sectors, adjusted for the GDP deflator. In real terms, most S&P 500 companies earn less at the margin for every person they hire. Labor Department data for labor productivity in the nonfarm sector appear tomorrow. These are harder to interpret; for example, “productivity” in banks is skewed by the poor earnings in the sector, and productivity in the energy sector is biased by the collapse in energy prices. The sales/employee ratio for major economic sector tells a more differentiated story.
Deflated sales per employee in the industrials sector have fallen by 15% since 2008, a result that does not square with the widespread claim that the new age of robotics is displacing employees. In information technology, sales per employee peaked in the middle of 2012 and have not regained their earlier higher level. Consumer Staples have done slightly better, but growth was negligible after 2013. The Materials sector is down by 20% since the 2012 high point. Some of this is due to relative pricing (materials prices have fallen with energy), but the miserable performance of the Industrials indicates that the problem is much deeper.
The chart below shows the average growth rate over three years for the sales/employee ratio for major S&P sectors. It has fallen for all sectors, and is negative in several of them.
This shouldn’t be a surprise: US corporations are hoarding cash, or paying out dividends, or buying back their own stocks, rather than investing in plant and equipment. They also are underreporting depreciation of their existing plant and equipment to prettify their bottom lines.
According to the GDP data released May 29, US corporations had only $300 billion of undistributed profits after adjusting for depreciation of their capital stock, compared to nearly $500 billion in late 2013. But they paid out $900 billion in dividends. That’s good for their stock price in the short run, but very bad for the economy.
On a GDP basis, nonresidential fixed investment is falling. Less capital means less output per worker, and less output per worker means less reason to hire more workers.
Why is there no investment? Let me count the reasons:
- The United States has the world’s highest corporate tax rate
- The crushing burden of regulation has virtually shut down startups except in social media and similar niches (for the first time since the numbers were kept, new businesses contributed exactly zero to employment growth since 2009)
- Federally-supported basic R&D in aerospace and defense, the principal source of new commercial technologies from the 1960s onward, has dried up
- America’s tech companies have changed from disruptive innovators to stable consumer franchises run by patent trolls instead of engineers
Without investment, productivity declines. With declining productivity, you die, no matter what else you do. Trade policy is virtually irrelevant in an environment of zero trade growth. Reducing American imports will do nothing to improve US growth. Weakness in the US economy is already taking care of that. The chart below shows year-on-year change in the volume of US imports (adjusting for price changes), as calculated by the Netherlands’ CRB Institute. A 6% fall in imports is the sort of number we associate with a mild recession.
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