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Productivity Is Flat - So What?

Economists have noted for a few years that US productivity has been flat since around 2011. It missed it's target by at least 5 points, and has stayed flat. Productivity is an indicator that usually means business is healthy.

Productivity is a measure of  the real value of output produced by a unit of labor during a certain time. It has been on a steady upward trek since 1950. United States Productivity 1950-2015 - Trading Economics. The only major slump is recent history.

A recent study, Why growth in finance is a drag on the real economy, concludes that finance is the problem. "When the financial sector grows more quickly, productivity tends to grow disproportionately slower in industries with lower asset tangibility, or in industries with higher research and development intensity."

Finance isn't the only problem. Technology is part of it. Technology improvements make it possible for labor to do more in the same length of time, or for less labor to be used. But technology has a long implementation time. Tech solutions that are developed today, may not be employed in the market for 10 years. During a recession, less is under development.

The business cycle during the recession may be another problem. Consumers are not buying. So it is easy for companies to become overconfident during short periods of increased buying, overproduce, and then have some employees doing nothing. When employees do less, productivity goes down.

Growth is a problem. Companies expect constant growth in product sales. The business plan and investor expectations never cease to expect growth. Expectations are not being met.

Manufacturing profits have been on a strong upward trajectory since at least 1997, but they stalled in 2011 - 2014, and dropped slightly. Markets are not significantly growing. Forecasts are missed. So companies are hesitant to invest in technology or R&D to make their processes more efficient. This has been going on since the start of the Great Recession in 2007, but it took until 2011 for the decline in productivity to materialize.

Net profits of manufacturing corporations in the U.S. from 1997 through 2013 - Statista

Companies depend on predictability. Oil prices, while down, have been volatile. Inflation, while down, is slowly driving prices ever upward.

Another cause, that may be because of the current structure of the CEO  relationship to investors, is if a CEO needs to put resources toward profits to increase stock prices, then he may stop R&D and technology investment to do that. It's short-sighted, but in line with investor expectations. Stock trading volatility may not even realize this is a problem. Productivity has been flat since 2011, after a long history of robust increases. It may be part of the reason why, even though business profits are soaring.

Others are looking at higher profit margins as a possible reason why productivity may be falling. Market Power, Labor's Share of Income, and Measured Productivity