This could be America's new No. 1 economic problem
A funny thing happened on the way to the current recovery: American productivity took a dive.
Even as hiring and the general outlook have improved since the recession, productivity has failed to rebound, prompting Capital Economics to call the issue "the No. 1 economic problem" facing the U.S. Productivity of nonfarm workers rose 1.3 percent at a seasonally adjusted annual rate in the second quarter, the Labor Department said on Tuesday.
While that's a scant improvement of 0.3 percent from a year earlier, the longer-term issue is that productivity hasn't returned to the country's 50-year average of 2 percent growth. During the past four years, it has barely budged, increasing at an average rate of 0.5 percent, according to IHS Global Insight.
While the slowdown's causes are much debated, there's one hard truth about its impact: Without higher productivity, Americans' standard of living will stagnate.
"It measures how your standard of living is going to increase. It won't increase unless you are increasing more output for worker," IHS U.S. economist Patrick Newport told CBS MoneyWatch. "If you care about your kid and their future, and if you want them to earn more money than you, it matters a lot."
Productivity -- which measures hourly output by dividing an index of real output by an index of the hours Americans work -- is the best measure of an economy's success, according to Newport, who estimates that productivity will likely rise by less than 1 percent in 2015.
One way of thinking about the impact of lower productivity is to view it through "the rule of 72," Newport noted. The rule is a calculation investors use to determine how long it'll take to double their money. At 2 percent productivity growth, the economic pie doubles every 35 years, which helps ensuing generations achieve higher standards of living. But with 0.5 percent productivity growth, it takes 144 years for the pie to double, he said.
Lower productivity growth means businesses need to hire to keep up with demand, which is good news for jobs, but not for wages, wrote PNC senior macroeconomist Gus Faucher in a research note.
That jibes with what many workers are experiencing in the post-recession years. While businesses are hiring again, raises are both paltry and rare. Many households feel they're barely able to keep up with day-to-day expenses, and it's not hard to see why. Real median household income peaked in 1999 at almost $57,000. Today, it stands at about $52,000, according to the Federal Reserve Bank of St. Louis.
What's depressing productivity? Are Americans simply slacking off at work? Or, as presidential candidate Jeb Bush suggested last month, working too few hours?
One theory is that the slowdown reflects a lack of technological progress. From the 1970s to the 1990s, for instance, computers revolutionized the way Americans work, thereby helping to boost productivity. But some, notably Northwestern University economist Robert Gordon, think the economic benefits of this shift are dwindling, and perhaps less potent as an engine of long-term growth than previous innovations, such as electrification around the turn of the century.
The problem could also be a lag in how businesses are adopting new technologies such as smartphones, Newport noted. "It could be that we are innovating, but it's taking a while to show up in the statistics and for businesses to incorporate it," he said.
Or are businesses simply not investing in the technology that would boost productivity? American corporations cut back on R&D during the recession, with spending only returning to more typical levels last year. The U.S. government has slashed R&D spending in areas such as medicine and energy to its lowest levels since 1956. (The Internet, by the way, came out of the government-funded DARPA.)
Said Newport: "Fundamentally, productivity growth is driven by innovations, and that's driven by R&D."