Slowing US productivity growth is reducing profits

That productivity has stopped growing means that unless the trend is reversed or real wages continues to fall, profits can no longer grow.

By , Guest blogger

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    The first pre-production Chevrolet Volt rolls down the assembly line at the Detroit-Hamtramck manufacturing plant in Detroit in this file photo.Karlsson argues that a slow in US production will reduce profits.
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Buried within the latest Flow of Funds report was the first preliminary estimates of Q4 2011 corporate profits and national income. The reports showed that national income increased slower than GDP, 2.9% in nominal terms versus 3.9% for GDP, or 1.8% and 2.8% respectively in real terms after adjusting for the 1.1% gain in the domestic demand deflator.

The report also showed that corporate profits had the first quarterly decline in years, though they are still up significantly compared to a year earlier. This quarterly might be temporary but considering how elevated they are now and the factors mentioned below they are probably not far from their peak.

What is telling though is that this decline in profits wasn't primarily the result of higher real hourly wages, though they rose slightly on the quarter while falling on the year, but of a rapid decline in productivity growth. Real gain in national income was as I wrote above 1.8%, but aggregate hours worked rose 2.8%. That comparison is partly misleading since national income includes the government sector while the hours worked number doesn't, but even after adjusting for that, we're still talking about roughly unchanged productivity, and a gain of less than 1% for the year.

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That productivity has stopped growing means that unless the trend is reversed or real wages continues to fall, profits can no longer grow. And with the labor market strengthening, it will be harder for firms to get away with cutting real wages. They might have a better shot at increasing productivity, but productivity growth has been on a downward trend basically for the last decade.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. This post originally ran on stefanmikarlsson.blogspot.com.

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