Behind Grim Jobs Data, a Potentially Hopeful Sign

By JON HILSENRATH and BRIAN BLACKSTONE There may have been a silver lining for the economy in the horrific December job losses reported Friday by the Labor Department. Companies are cutting back so aggressively that they actually might be increasing their productivity even in the face of a wrenching economic shock. The contraction in the number of hours worked might have been greater than the contraction in overall economic output for the quarter, which will be reported later this month. In other words, businesses appear to have squeezed more out of the workers they kept on staff, increasing business productivity -- a measure of the nation's output per hour worked by the work force -- even though the economy was going through its most severe contraction in decades. In the long run, strong productivity growth should drive profits, and, potentially, real wages higher. In the final three months of 2008, employers reduced the number of hours that workers logged at a 7.7% annual rate, through a combination of layoffs and cutbacks in overtime and manufacturing production shifts. It was the largest quarterly contraction in hours worked since 1975, according to Macroeconomic Advisers LLC, a St. Louis research firm. The government's estimate of productivity growth comes out in early February. Most economists focus on productivity growth among nonfarm businesses -- excluding agriculture, government and certain parts of housing. Macroeconomic Advisers estimates that output in the nonfarm business sector contracted at an 8.25% rate for the quarter, while hours worked during the quarter contracted at an 8.6% annual rate. "Nowadays, [companies] seem to anticipate a decline in output and lay off workers ahead of time," said Barry Bosworth, a productivity expert at the Brookings Institution, a Washington think tank. Mass layoffs, fewer overtime hours and eliminated production shifts are fundamentally bad news because they mean workers are suffering. But it also means the economy is adjusting to the shock of the financial crisis -- and the crisis can't end until an adjustment has taken place. Of course, economic problems persist: Banks still sit on large losses from bad assets. The job losses tied to strong productivity means further strain on millions of households. And it is possible the good productivity news could be revised away by statisticians. From the Independent Street Blog Are You Using the Bad Economy To Get Better? U.S. productivity trends have changed dramatically in the past decade. The U.S. experienced a productivity boom in the late 1990s, and it has proven surprisingly enduring. Productivity hasn't declined on a year-over-year basis since 1995. In the 1970s and 1980s, it experienced long contractions around recessions. Chris Varvares, a Macroeconomic Advisers economist, says many companies entered this downturn with inventories relatively lean, meaning companies haven't been caught on their heels by the collapse in consumer demand. The expanded use of temporary workers also has made it easier for businesses to adjust their work force as the environment changes. Technology has made it easier to manage inventories and employment levels. A rise in productivity would be a potentially positive mark on the economic record of President George W. Bush, who has presided over two recessions, a dismal stock market and a housing bust. In the 30 full quarters that Bush has been president, through the third quarter of last year, nonfarm business productivity grew on average 2.6% at an annual rate. That is compared with 2% for Bill Clinton and 1.6% for Ronald Reagan.