Why is productivity soaring?...

While vigorously cheered by economists and business, the astonishing growth of worker productivity defies easy explanation.

The productivity of U.S. workers kept surging in the fourth quarter as companies squeezed more out of remaining staff to boost earnings.
A measure of employee output per hour rose at a 6.2 percent annual rate, capping the biggest one-year gain since 2003, the Labor Department said today in Washington. Labor costs dropped at a 4.4 percent pace, more than anticipated, and fell 0.9 percent for all of 2009, the biggest drop in seven years.
Efficiency improved last year as companies slashed worker hours even after sales stabilized, a feat that may be difficult to sustain much longer as demand continues to grow. Lower expenses also help curb inflation, giving the Federal Reserve room to keep the benchmark lending rate near zero.

“Historically, productivity gains of the sort we have seen over the last three quarters have come right before we’ve seen a substantial improvement in job growth,” Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, said before the report. “Businesses have simply been pushing their current workers to the absolute limit.” [More]

This seems to be the accepted cause: flogging the galley slaves (the few left) harder. And I agree there is considerable truth in that idea. The fear of unemployment has more of us working more whilst biting our tongues. 

I'm not the only one wondering and surprised by today's number. Consider this skeptical pronouncement just a few days ago when the GDP figure was released.

Third, if you believe the GDP data — remember, there are more revisions to come — then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising — just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we’re not buyers of that view. In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labour input has never before, scanning over 50 years of data, coincided with a GDP headline this good. Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed’s National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate. No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker — a few grains won’t do. [More]

[We'll pause for the gracious retraction.] Given this argument, perhaps we can put a little more stock in the GDP growth rate, but unnerving as it is to me, this doesn't portend much for employment when tempered by worker productivity growth. Oddly, from an investor point of view (albeit very short-range IMHO) some are delighted.

Those bemoaning the increase in U.S. joblessness are right to do so. But they should also remember that unemployment is a direct result of the U.S. economy's greatest strengths - its ability to grow productivity even in a recession.

The Conference Board publishes a Total Economy Database, which gives productivity growth figures - nearly 50 years' worth, in some cases - for most of the world's major economies. The results for 2009 were just released. And the Conference Board's conclusion jumps right off the page at you: The U.S. economy is nowhere near as bad off as many pessimists believe.

In the U.S. economy's bid to rebound in this post-financial-crisis world, productivity growth may be this country's secret weapon.

Productivity growth is damned important to investors. Countries with high productivity growth - like China and most of East Asia - become steadily more muscular exporters. Thus, companies from those countries tend to enjoy a growth in market share and profitability that can provide truly stellar returns for investors. Conversely, companies from countries with inferior productivity growth (Italy and Mexico come to mind) tend to find that life as an exporter becomes steadily more difficult: Their costs soar and profits drop at a faster pace than any of their rivals.There's a clear lesson here: If you're looking for profits, put your money where the productivity growth is healthiest.

That's why last year's heavy U.S. layoffs - in the long run - may end up being good news. U.S. gross domestic product (GDP) declined by about 2.5% during the year, according to Conference Board estimates. However, U.S. employment declined by 3.6% and hours worked declined by 1.5%, so the labor input to U.S. production declined by 5.0% (after rounding). If the input declines 5% and the output declines by only 2.5%, productivity has risen by 2.5%. It's the most painful form of productivity growth in the known universe, but it's still real growth. [More]

But as long as it's not your pain, I suppose...

While this is one of those "non-farm" numbers, I don't think our sector is immune. The ongoing furor over megafarms and farmer number decline could be much less about "greed" than about ability to cover acres with fewer people.

I see one possible common thread between sectors: information technology. The use of computers is first. While the introduction of computing power to the lowest levels of production was positive for worker productivity I suspect having workers who have grown up with ubiquitous computing power will unleash hitherto untouched ways of doing more with fewer people.

The oncoming work force in agriculture takes far less time to learn new computing skills and applications, is more willing to experiment, and faces simpler ways to resolve the decreasing number of hangups. (We outlived Vista, for example). While we are only scratching the surface of what computers can do, we are far more likely to tap that potential with farmers who learned keyboarding early, as opposed to hunt-and-peck dinosaurs such as yours truly.

The second wave of productivity boost arises from connectivity.  Let's face it - we are the Borg. Our farms never have to pause to share information between brains.  (In fact, many of us are looking for ways to control the "sharing") From locating tools to sourcing parts to explaining how to unplug the header, farmers don't have to travel "there" first to solve the problem. The result is more experiential knowledge is available all the time and with ease.

The other big change for the better is technology is overcoming our aversion to writing. From e-mails to stored text messages, more of our communication is searchable, readable, and permanent. The gains for information leakage and loss are likely immense.

Finally, I think this trend in productivity is not only real, but will accelerate. Not only because technology will keep handing us better tools, but because we have humans who are much more adaptable and instinctive in their approach to them.

In short, you ain't seen nothin' yet.

Now tell me your plan to make sure you have one of those increasing rare good occupations. Or more specifically, how does your career path counter the increasing threat of your work and job skills becoming obsolete overnight?