The U.S. productivity boom may explain how inflation eased amid a strong economy

Washington DC
CNN
—

Americans are on the verge of living on a historic trajectory Economic Event: Inflation fully returns to normal – after continuous punishment Interest rate hike – without inertia. It's a scenario analysts refer to as a „soft landing.”

The substantial improvement seen so far can be attributed to the recent burst of productivity growth.

Strong U.S. productivity last year meant workers produced enough in a variety of industries and services to offset those higher labor costs, at least to a large extent, without employers passing on strong wage gains to consumers.

In economics, the concept of productivity is an everyday word. If productivity is strong, it means the U.S. economy is underperforming or overproductive. Since that was true last year, it means the economy has been able to grow The strong momentum it did 2023 without triggering inflation.

Productivity is measured by dividing all goods and services produced in the economy by each hour people work. That rate rose 2.7% in the fourth quarter from a year earlier, according to Labor Department data, the average increase over the past two decades. After falling sharply in 2022, productivity rose strongly the following year.

„Productivity is incredibly important to the broader economic and inflation picture, so the question central banks are considering is whether workers are going to be more productive,” said Lauren Goodwin, economist and chief market strategist at New York Life Investments. told CNN.

There is no concrete reason why productivity grew so strongly last year.

A popular theory is that the proliferation of generative artificial intelligence may have made operations more efficient for certain tasks. Researchers argue that GenAI May be interchangeable Like the widespread adoption of the Internet at the turn of the century, in the world of finance and economics, and society more broadly.

But greater productivity gains due to GenAI may take time to become a reality, as workers must first be trained on how to use it and companies must figure out how best to integrate GenAI into their processes, said Mark Jandy, chief economist at Moody's Analytics. Before CNN.

Another possibility is that companies overproduced last year in anticipation of a recession that never happened, according to economists. The job market was strong last year, but some large companies are still cutting costs, including layoffs. For example, Microsoft, Meta, 3M and Citigroup have cut thousands of jobs in the past year.

„Many companies that laid people off in anticipation of a significant recession are now lean and mean,” John Min, chief economist at Monex USA, told CNN. „But the economy performed better, so that translated into higher productivity, supporting higher wage growth and keeping inflation from accelerating.”

Last year's productivity boom could be a combination of the above.

It is clear that Federal Reserve officials consider productivity before making policy decisions. „You can't say anything about wages until you actually know what's going on with manufacturing,” Chicago Fed President Austin Goolsbee told Bloomberg in an interview last year.

But an economic indicator is difficult to measure accurately in real time, which is why it rarely moves financial markets whenever it is released.

It is published quarterly, the data is usually subject to heavy revisions and it is difficult to accurately measure the productivity of services.

„The U.S. is mostly a service-based economy rather than manufacturing, so if I count the number of widgets produced per hour, that's pretty accurate, but on the service side, it's really hard to know the price. Haircuts because of inflation or because it's a great haircut,” Min said. .

With 2023 already in the rear-view mirror, productivity may have played a role in paving the way for a soft landing.

However, it will be too early to know whether last year's productivity explosion was actually a transformative change in the US economy.

„Sometimes at the end of an economic cycle, cost-saving measures can boost productivity,” said Goodwin of New York Life Investments. „Because productivity is so high, distortions like cutting labor hours can emerge, but when you look at the bigger picture, companies are cutting costs by giving people fewer hours, effectively paying less. For the economy.”

„However, my expectation is that we will see improvements in productivity as a result of productive equipment, which will contribute to inflation in the long run,” he said.