Nov 7, 2019

The bad news about historically low unemployment

Illustration: Aïda Amer/Axios

Wednesday's productivity report is the latest sign that historically low U.S. unemployment may be indicating a sick, rather than a healthy economy.

What's happening: As uncertainty has increased over the U.S-China trade war and other geopolitical events, companies that have the capacity to invest in new equipment, technology or factories are holding off and hiring workers to pick up extra slack instead.

Why that's bad: The increase in hiring is less about expansion or optimism than the fact that workers are a cheaper investment, and one that is easier to reverse should the economy go south.

  • "If the economy improves, that’s great, you’ve got more workers; if we do have a recession, then you have the flexibility of deciding whether you need to lay off some workers," Bernard Baumohl, chief global economist at The Economic Outlook Group, tells Axios.
  • "At that point, you’re treating workers as inventory."

By the numbers: This story of hiring as uncertainty insurance is borne out in the data, experts say.

  • U.S. real output per hour, seen as the standard measure of worker productivity, fell by 0.3% in the third quarter from the second, marking its first quarterly decline in almost four years.
  • Similarly, the latest U.S. GDP report showed business investment had declined for the second quarter in a row, falling by 3% from the quarter before.

Why it matters: Productivity is the secret sauce to economic growth, and the U.S. has had underwhelming productivity growth for the last 15 years — a full 1% below the pace of annual growth in the 15 years prior.

  • Further declines could weigh seriously on already slowing GDP.

Threat level: A basic way to measure productivity is, "Do you give workers more tools?" David Kelly, chief global strategist at JPMorgan Asset Management, tells Axios. "We're actually increasing the number of workers and decreasing the number of tools in the last two quarters. That doesn't bode well."

Yes, but: Experts also remain bullish on a positive outcome to the trade war and other uncertainties clouding the economic outlook.

  • Further, the rising wages of Americans — and the increasing trouble businesses are having finding qualified people to hire — may force corporate America's hand.

The last word: "If freedom is just another word for having nothing left to lose, then productivity is just another word for having no one left to hire," Kelly says.

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U.S. GDP growth revised higher to 2.1% in third quarter

The U.S. economy grew at a 2.1% annualized pace in the third quarter — faster than the initial read of 1.9% — according to revised data released by the Commerce Department on Wednesday.

Why it matters: The revision occurred thanks to an upward revision in business spending, indicating that the economy's slowdown was not as harsh as feared in the face of the U.S.-China trade war. The change means that economic growth accelerated marginally from the prior quarter's 2% growth, but it's worth noting that economists are much less optimistic about growth prospects for the current quarter.

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