Uncle Sam sees cure as productivity surgesAnd UK wages set to fall

But producers see costs rise

Toyota plan in disarray
 

Uncle Sam sees cure as productivity surges

US productivity surged by a stunning 6.2 per cent (on an annualized basis) in the fourth quarter. Actually that was down slightly from the previous quarter when annualised productivity was up 7.2 per cent, but it is hugely impressive, nonetheless.

The big question, however, is why?

Is productivity up so high simply because US businesses have cut costs until they are left with an ultra efficient core? And as they start to recruit, will these productivity gains be lost?

It is a funny thing, but even the most impressive up comes with a downside.   For if labour is able to produce so much for less labour input, think how much demand will have to rise in order for employment to then pick up.

Even so, one can be overly cynical.

We all know that sometimes, in order to fix a problem or improve upon something, you sometimes need to rewind: go back to the beginning. Why should it be any different for the economy?

 The credit crunch has enforced a lot of what the economist Joseph Schumpeter called creative destruction on the US economy.  Uncle Sam will surely emerge – eventually – with a more dynamic economy.

When economists talk about there being a permanent loss from a recession – which they often do -  they overlook this. Sometimes the long term effect of a recession can be a more efficient economy as the bad ideas and businesses are purged. It is harsh, it not a pretty thing to hear, but it happens to be true.  And maybe the rise in US productivity is an early sign of this creative destruction force in action.

 And UK wages set to fall

 Brrr. It’s cold. It’s snowing again. But alas, it is not only the weather that is freezing, so is pay.

 According to the Labour Research Department the rate of wage freezes is accelerating. It says that pay freezes make up a higher proportion of all wage deals than at any other time during the recession.

The snag is, consumer price inflation is expected to top 3 per cent this month.   The truth is real wages are falling.   In November average earnings rose by just 0.9 per cent.

Those who say we are set to see a re-run of the 1970s with inflation returning with avengeance seem to overlook what’s happening with wages. 1970s inflation was typified by rising prices leading to rising wages, forcing prices up further, forcing even higher wages increases. There isn’t even a hint of that happening again.

But given the way wages are in such limbo, it is hard to see how house prices are going to carry on rising, as some predict.

But producers see costs rise

But while wages limp upwards, producer prices leap.

Producer prices were up a worrisome 2.8 per cent in January on the month before, while output prices were up a more modest 0.4 per cent.

On a year on year basis it is looking pretty alarming, with input prices rising 8.4 per cent.

For producers this is a blow, because it seems their costs are rising faster than their ability to increase prices. In other words they are swallowing more of the costs. Mind you, Capital Economics reckons it will be quite a while before these rises in producer prices shows up in inflation data.  It says: “The long lags between movements in producer prices and consumer prices suggest that the key influence on CPI inflation over the next 12 to 18 months will be the pass-through of the previous sharp falls in PPI inflation seen in the second half of 2008 and last year.”

Toyota plan in disarray

Maybe there are some who predicted the problems at Toyota, but it seems very few. This really is a crisis that came somewhere from left midfield, wherever that is.

Maybe, when the dust has settled the underlying cause of the problems at Toyota will be explained to us. Maybe it has something to do with loss of face, that there was an unwillingness to admit to problems. Maybe it has something to do with cultural tradition, and the greater respect for authority common in Japan, meant workers were less willing to question company practice.

The truth is, however, there are occasions when events are just not predictable. Of the world’s 100 largest firms in 1912, by 1995 29 had gone bankrupt, 48 had disappeared, and just 19 were still counted in the top 100 – That’s according to research from L Hannah in a paper for the Centre for economics and Performance in 1997 called “Marshall’s Trees and the global forest” see  Google versus Microsoft: the war escalates for more on L Hannah and Marshalls’ redwoods)

The point is, sometimes we forecast what is going to happen, but all we are really doing is guessing. The future is a more mysterious place than economists and analysts seem to think it is.