Does your company have you pulling your hair out because they fired all your colleagues and expect you to do all the work? Perhaps relief is on the way.The latest issue of Bloomberg Businessweek had a great segment titled "Seeking the Number That Explain It All: Four economists discuss their favorite indicators as they try to gauge where the U.S. economy is headed". Dean Maki of Barclay's Capital weighed in citing Real Consumer Spending as his primary tool. Dan Greenhaus of Miller Tabek prefers to watch Nonfarm Payroll data while David Rosenberg of Gluskin Sheff + Associates prefers watching Home Prices.
The most interesting commentary came from James Paulsen of Wells Capital Management. He uses productivity as his leading indicator on the economy. While Greenhaus looks at Nonfarm Payroll data, Paulsen is attempting to see the signs of improvement before they are reflected in the jobs reports. As Paulsen explains, when a recession begins CEOs initially clamp down and look for ways to cut costs. The cost-cutting initiatives seen in the US led to a surge in productivity as employees were forced to maintain output while relying on fewer co-workers.
| Year 2008 | %Δ in Productivity | Year 2009 | %Δ in Productivity | Year 2010 | %Δ in Productivity | ||
| Q1 2008 | (0.9%) | Q1 2009 | 3.5% | Q1 2010 | 3.5% | ||
| Q2 2008 | 1.2% | Q2 2009 | 8.3% | Q2 2010 | (1.8%) | ||
| Q3 2008 | (1.1%) | Q3 2009 | 7.2% | Q3 2010 | 2.5% r | ||
| Q4 2008 | (0.3%) | Q4 2009 | 6.1% |
As the chart above shows, the year 2009 was the year of productivity enhancements. With three quarters registering above 6% growth in productivity, firms were able to accomplish more output with fewer workers. This cost-cutting fueled the surge in corporate earnings even while top-line revenue growth was much less impressive.
Fast forward to 2010 and we now see productivity growth slowing. In order for firms to continue growing they will need to begin hiring much more aggressively. Recessions are often healthy in a broader economic sense squeezing out inefficiencies and redundancies and we are emerging from a very deep one. As these streamlined companies start to add employees again average costs will likely be lower as productivity has been vastly improved. Paulsen boldly predicts that "we're going to have job gains around 225,000 average monthly next year". Let's hope he's right!
Brandon R. Rowley
"Chance favors the prepared mind."