Productivity Is Making A Roaring Comeback

This is an excerpt from the February 5, 2024 Yardeni Research Morning Briefing.

Our Roaring 2020s economic scenario is predicated on our assumption that chronic labor shortages, especially of skilled workers, will cause businesses to boost the productivity of the available labor force. Technological advances will enable the boost, and it should be a dramatic one. Accordingly, we expect a productivity growth boom during the current decade. It may well be that the boom started at the end of 2015, was interrupted by the pandemic, and now is progressing again. Indeed, last year’s productivity gains were impressive. This year is starting out with the promise of more gains to come. Consider the following:?

(1) GDP math. From a supply-side perspective, the math for the potential growth rate of real GDP is very simple. It is equal to the growth rate of the labor force plus the growth rate of productivity. To track the underlying trends in this relationship, Debbie and I monitor the yearly percent changes in the five-year average of real GDP, the civilian labor force, and productivity (Fig. 1). Over the past five years through Q4-2023, real GDP rose 2.1% at an annual rate with the labor force up only 0.6% and productivity rising 1.5%.

Over the remaining six years of the current decade, the labor force should increase 1.0% and productivity should increase by at least 2.5% and perhaps as much as 3.5% in the Roaring 2020s scenario. That would result in real GDP growth of 3.5%-4.5%. In fact, that’s a conservative forecast given that during the previous three productivity growth booms, the five-year trailing peaks ranged between 3.0% and 4.1% (Fig. 2).

Again, on a five-year annualized basis, productivity growth bottomed at 0.6% during Q4-2015. It rose to 1.9% during the five-year period through Q4-2023. So in our opinion, the productivity growth boom has been underway since the end of 2015 and is back on an ascending track following a volatile period with a big up and then a big down move during the pandemic.

(2) Productivity in 2023. Last year started with a 0.8% (q/q saar) drop in nonfarm business productivity during Q1 (Fig. 3). However, that was followed by gains of 3.5% during Q2, 4.9% during Q3, and 3.2% during Q4. On a y/y basis, productivity rose 2.7% during Q4. The historical average growth rate since Q1-1947 is 2.1% (Fig. 4). Productivity growth has made a roaring comeback.

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