American workers have become less productive in the past two quarters. A sizable number of new workers were added to the payroll yet overall production barely increased. So production per person declined. Without rising worker productivity many bad things can happen to the economy – including a faster rise in mortgage rates.
More detail on the numbers: In the first quarter, productivity fell at a 1.9 percent annual rate, following a 2.1 decline in the prior quarter. There have not been 2 consecutive quarters of decline in over 20 years. Since this time last year, productive is only barely positive with each worker producing 0.48 percent more for each hour or work. The 3.2 million net new hires over the past 12 months have not meaningfully pushed up GDP. The historical productivity growth rate in the U.S. has been around 2 percent per year. In the past four years, productivity has been disappointingly low with less than 1 percent growth.
Is it a big deal whether it rises at 1, 2 or 3 percent? Definitely! Faster worker productivity means
faster worker wage increases
faster economic and tax revenue growth
lower consumer price inflation, and
lower mortgage rates, among many other beneficial effects. If productivity was to rise at 1 percent then the standard of living would double in about 70 years (that is, grandchildren will have twice as many things as their grandparents). If productivity was to rise at 3 percent then the standard of living would double in 24 years (that is, children will have twice as many things as parents).
Due to disappointing productivity figures of late, expect companies to scale back hiring decisions and be stubborn about giving raises. Also inflation, which had been non-existent, could slowly increase and, consequently, pressure mortgage rates to rise a bit.
Some say, because of the service nature of our economy, with less manufacturing the productivity growth will be more challenged in upcoming years. However there are many examples of where even a person facing physical handicap can raise productivity. Many wounded soldiers become productive citizens in software development, teaching, financial planner, and a multitude of other professions that are knowledge-based and not necessarily physical. One long ago example was of a young man who lost a hand from a factory accident. He then went to work doing minor tasks at a local drug store. Then an idea popped in his head: why not turn a drug store into a convenient place to buy other things? Mr. Walgreen went on to make a fortune even with a physical handicap because he greatly boosted retail store productivity.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.