The Weekly Wire: Productivity, Profits, and Pay
Despite challenges like the Delta variant, supply chain issues, and labor mismatches, the US economy grew its Q2 real GDP to $22.7 trillion with a revised 6.6% growth rate, driven by significant productivity gains (4.3% in Q1 and 2.3% in Q2) that have enabled record corporate profits of $2.7 trillion and rising average hourly earnings, highlighting productivity as a key factor sustaining economic recovery, supporting wages, consumer spending, and corporate profitability.
Despite the Delta variant of the coronavirus, supply chain bottlenecks, a spike in input prices, and a meaningful employer/employee mismatch (there are more job openings than there are job seekers), the US economy continues to power ahead. Last week, the Bureau of Economic Analysis (BEA) let us know they revised their estimate of Q2 real GDP growth from 6.5% to 6.6% and that current dollar GDP sits at $22.7 trillion.
What is remarkable about the rate of GDP growth is that it’s taking place despite the staffing challenges confronting so many companies. Remember, GDP is essentially the coming together of people (the size of the labor force) and how much stuff they can make (productivity). In a perfect economic world, you have more people producing more goods and delivering more services that satisfy end-market demand.
While productivity gains have been key to the dramatic rebound of the US economy (worker productivity grew 4.3% in the first quarter and 2.3% in the second quarter; those figures compare with average annual productivity growth of 1.2% from 2010 to 2019), productivity gains can also be key to the sustainability of the recovery as they would enable companies to keep producing more even in the face of labor shortages and, importantly, pay employees more (which should support consumer spending), while maintaining or even increasing corporate profitability (which is key for both the stock market and corporate investment).
On that front, corporate profits hit a record $2.7 trillion in Q2 even as average hourly earnings are up about 4% year-on-year (and up much more than that across broad swaths of the economy). In sports, commentators and athletes often talk about winning curing all sorts of problems; well, in economics, productivity growth cures all sorts of problems.