Thursday, November 05, 2009

Productivity Numbers From Fantasy Land

The U.S. Department of Labor claimed today that quarterly productivity rose 2.3% (9.5% at an annual rate) from the previous quarter while it rose 4.3% compared to a year ago. Since this number was based on the supposedly strong GDP number and the supposedly super weak employment numbers we've seen, this was not very surprising. This supposedly meant that unit labor costs dropped 3.6% compared to a year ago while sales prices rose 0.8%.

Since labor costs constitute the bulk of business costs, this would imply that profits must have risen, especially since many other costs (like net interest and capital consumption) have dropped too. Yet in the real world it is reported that profits fell nearly 20% while corporate income tax revenue fell by nearly half.

If neither workers, capitalists, creditors or governments are seeing any gains, just where does this all these alleged productivity gains go? It is true that a large part of the drop in corporate income tax revenues is the result of tax law changes, and that part of the drop in profits reflect a decline in earnings from foreign subsidiaries of U.S. companies. But even then, the numbers simply doesn't add up (especially since lower tax payments should boost reported net income).

Either for example the labor market is stronger than the employment reports say (either in the form of higher employment, longer working hours or higher wages), or the GDP number greatly exaggerates real growth-or both. I personally think that it is both, but mainly that the GDP number exaggerates growth.