Productivity: Dead, Dormant Or Hidden?

As the U.S. grapples with a nose-dive in productivity, some analysts warn we're in for something awful. Some call it "secular stagnation," others "the demise of U.S. economic growth.

Believe it or not, we've been here before. "Secular stagnation" was first identified in 1938 — and the economy hasn't exactly sat still since then.

But six years into a grindingly slow economic expansion following the worst downturn since the Great Depression, some scars linger, even as the Federal Reserve gets set to start its first rate increase regime in a decade.

Productivity — defined as output per hour worked — isn't well-understood, but it may be the best guide to long-term wage growth and economic gains.

But productivity has fallen in each of the last two quarters, the first time for such a dismal reading since 2006. Productivity growth has averaged a measly 1.1% since the recession ended in mid-2009 — less than half its 2.5% average from 2000-09.

Meanwhile, nominal wage gains have averaged about 2%, not much better than underlying inflation.

Federal Reserve Chairwoman Janet Yellen in May called productivity "the most important factor determining living standards" in the economy as a whole — not just for individuals.

But Yellen also conceded that the reason for the slowdown is unclear. Economists have very different ways of thinking about productivity — not just why it's faltering right now, but also where it's going in the future.

Productivity 'Perfect Storm'

Conference Board Chief Economist Gad Levanon sees a "perfect storm" of factors that are suppressing productivity growth and the economy's potential GDP growth rate.

First and foremost, he argues that a tectonic shift — replacing workers with technology — is mostly over.

What Levanon and others call "low-hanging fruit" — the shift from factory workers to robots, secretaries to computers — is now gone. "If there is a next wave, why are we not starting to see it?" he asked.

Combine that long-term trend with sluggish capital investment and depressed entrepreneurship since the recession and it's no wonder productivity is squashed, he said.

Levanon paints a bleak picture of America's future if productivity stays low and other structural factors suppress workforce growth.

He believes "the new normal" could be even worse than the 2% GDP growth PIMCO was forecasting when they coined that term in 2009. Levanon thinks it's more likely 1.5%. That essentially would be no growth on a per capita basis, suggesting living standards would stall. It also would be a grim reality for corporate profits and fiscal policy.

Invisible Innovation Nonsense, said Jim Glassman, a senior economist at JPMorgan Chase. "If you try to figure out what's going on, economists are the last people I'd ask. It's common sense that things are happening in the innovation question.

Official government data simply can't capture the impact of those enhancements, Glassman says.

It's also widely accepted that productivity in the service sector is both harder to measure and harder to improve than productivity in manufacturing. The government, health care and education sectors are especially difficult.

As the U.S. started to shift from manufacturing to services several decades ago, that sparked the productivity crisis of the 1970s.

The App Economy

While the initial innovative automation shift impacted manufacturing, the next wave will impact services, says Joel Naroff, an economist who often consults to businesses.

That's much bigger than Uber and the rest of the "on-demand, mobile economy," he said. It's showing up in things like pre-ordering at restaurants, and the use of new devices to allow servers to deliver orders to the kitchen.

Glassman points to routine work once done by lawyers now available in software, while consumers can buy more and different types of goods and services all under one roof at places like Wal-Mart (WMT) and Costco (COST).

"Every time I see a merger I see double the work being done with half the people," Glassman added.

That may sound like a red flag for hiring, and while Glassman acknowledges that some structural factors like boomer retirements will be a headwind, he also thinks that with a little distance from the Great Recession, the job market will eventually be just fine.

"The financial crisis was a nightmare and it did a lot of damage," Glassman said. "In the early days of a recovery it always feels like a new normal. One hundred years from now when people look back it won't look all that different" — just more elongated — than other business cycles.

An America That Quits

For Naroff , there is no productivity puzzle.

"We've always assumed that wages rise because productivity rises," he said. "I argue that it's a simultaneous relationship.

With labor markets slowly tightening, the number of workers quitting has risen. That's a sign of confidence that they can find a better-paying job, which usually means a more productive one.