No Surprise Productivity Growth is Slow

The following graph shows a pattern of productivity growth through a business cycle. The graph plots my UT index against Year over Year % change in productivity for the past 41 years. (Link to FRED data for graph, 1974 to present)

productivity gut

The UT index is a measurement of effective demand. It measures the difference between effective labor share and the composite utilization of labor and capital. The UT index is mostly a measure of spare capacity. As the UT index falls to zero, the business cycle is maturing and coming to an end. As the UT index average rises from zero, a business cycle is going through and recovering from a recession.

The orange line is data from 1974 to 2001. The high portion of the orange line where the UT index goes over 19% happened during the Volcker recession. That portion shows high spare capacity but low productivity growth. It is an anomaly because the recession was induced.

The blue line is data since 2002. The red dot near the crossing point of the axes shows the current data point for 3Q 2015.

The plot moves within the shaded area. For instance, if you expect to have productive growth of 4%, data shows that you need to have a UT index of spare capacity at least 6%. Also, if you have 0% growth in productivity, you can expect to have less than a UT index of 7%.

On the other hand, if I see a UT index of 1%, I would expect productivity growth to be between 0% and 2%. If I see a UT index of 10%, I would expect productivity growth between 2% and 5%.

The general trend is that productivity will increase when more spare capacity opens up in a business cycle.

Looking at the position of the red dot of current data (1% UT index, 0% productivity growth), there really is no surprise that productivity growth is low.

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