Productivity Gains End, Tough Road Ahead

September 17, 2010

The latest BLS productivity report released in September shows a decrease of 1.8% in productivity for the non-farm business sector.  After 5 quarters of increasing productivity, it is not surprising to see a dip.  I would expect productivity to be flat or slightly down for several more quarters.  While this severe recession has tested the government’s ability to produce these kinds of macro measures, I do think that this reflects reality.

During a severe downturn, most businesses are in a race to resize their capacity in line with demand.  As the view of demand grows more pessimistic, companies begin to anticipate the drop and get “ahead of the game” on capacity reductions.  As demand bottoms, a large productivity improvement is expected in the macro economic numbers.  While companies did reduce some non-value adding activities, most of these improvements are purely from sizing with no upside buffer of people capacity. Most did not improve the way that they operate and some merely reduced service levels hoping that customer defections would be minimal.

With most reports calling for a slow recovery, it is more important than ever for companies to drive real efficiency gains.  This means truly changing the way that they operate.  The biggest obstacle appears to be the perception that cuts have gone as deep as they can.  My view is that most companies have areas where they have cut too far but others where substantial opportunity remains.  The big challenge is ferreting out each and addressing them appropriately.

There is debate about the impacts of off-shoring on the macro productivity numbers, but the fact remains that the US must drive significant real productivity improvements to compete with increasing capabilities in other countries labor markets.  More on this topic to come….

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