U.S. worker productivity started off strong in the first part of 2019. In fact, some sources like those in the Washington Post noted that U.S. worker productivity during the first quarter of 2019 grew at the fastest rate in four years.
What Goes Up Must Come Down
But now it’s being reported that the third quarter of 2019 experienced the sharpest drop in U.S. worker productivity since 2015. The 0.3 percent annual rate decline occurred from July to September of this year with a smaller decline of 0.1 percent among manufacturing companies.
This came as a surprise to many economists who previously estimated continued productivity gains to follow on from the first two strong quarters. Many sources believe that Chinese tariffs enacted by President Trump are to blame for such a dramatic decline in U.S. productivity.
Temporary Dip or Warning Sign?
Seeing that the year started out with gains that were considered the largest in four years, this largest drop in four years may just be part of a self-correcting economic mechanism. In that case, the economy may speed up again fueled by the upcoming holiday season and ongoing lower interest rates.
As an entrepreneur and business owner, however, you may want to keep a close eye on what occurs over the rest of 2019 and 2020. That’s because the productivity drop may be a warning sign of something larger and more worrisome. The future may hold another recession if productivity continues to spiral downward.
The trade war between the U.S. and China has already impacted global supply chains and slowed economic growth around the world. In response, U.S. companies and those in other countries have responded by taking their foot off the production gas.
Tracking Productivity Metrics
Productivity is calculated by taking the difference between output and the hours people work to create that output. In this case, while output has been rising over the course of the last four years, the number of hours spent on producing that output has accelerated well past that output. That means the output costs significantly more due to the unit-labor costs involved.
Now, add the trade war with China and many companies are reconsidering their investment in expanding output and covering all those labor costs. When companies decide to slow or even stop their investment, productivity may drop even more in line with falling profit margins. For employees, the result might adversely impact what had been a rising standard of living due to the higher pay and low inflation.
What You Can Do
As a startup or small business looking to minimize any risk of becoming a recession victim, it’s important to keep watch on these global events. Watching how enterprises are reacting in terms of changing their output and investments can guide your own strategy. By understanding how these changing metrics impact business decisions, you can be proactive in adjusting your own investments. Scaling back sooner than later can help you maintain greater cash flow even if a recession hits in the near future.
