Sunday, August 21, 2016

Potential Productivity

"Since 2007, the rate of productivity growth has been disappointing", John Cassidy writes in The New Yorker. "Since 2010, it has been extremely disappointing."

Here's a close-up of productivity growth since the start of 2011:

Graph #1: Productivity Growth 2011 Q1 thru 2016 Q2
The linear trend line is very flat at 0.5 percent. Productivity is low and not improving. What's more, the last few readings show a downward trend. Extremely disappointing, as John Cassidy says.

But we do not know where the red line will go next. It was lower in mid-2013 than it is now, and it went low more quickly. Then it turned around and went up even faster. So you never know.

Here's a close-up of productivity growth in the quiet time before the Goldilocks years of the 1990s:

Graph #2: Productivity Growth 1993 Q1 thru 1995 Q1
The linear trend line is very flat at 0.5 percent. Productivity, low and not improving. The last few readings show a downward trend. Productivity growth was disappointing. Just like the first graph.

Here's a close-up that picks up where Graph #2 leaves off:

Graph #3: Productivity Growth 1995 Q1 thru 1997 Q1
The linear trend rises from 0.5 percent to nearly 3% in two years.

You never know.

To my way of thinking, Graph #1 (our time) is very much the same as Graph #2 (the early 1990s). But I think we are at the end of Graph #2 and ready to start Graph #3. That makes all the difference.

Oh come on, you are saying. Graph #2 shows only a couple years. Graph #1 shows almost six years. There's no comparison. The slump is endless this time.

It's not endless. That's the point. The quiet time before the vigor is longer this time -- about 2½ times as long, my guess. I'm telling you we are at the end of the quiet period. Soon we will see productivity start to climb, just as on Graph #3.

On Friday I showed productivity growth with bright red circles around the two quiet times -- the recent years, and the early 1990s. Our low productivity has lasted much longer than that of the 1990s:

Graph #4: Productivity and Debt Service
Yes, and it shows that the "bottom" in the dull red "debt service" curve has also lasted much longer this time. But you can see from the shape of that curve that it wants to go up.

And you can see from the early 1990s that when the debt service curve goes up it goes up quickly, and productivity goes up with it. And the economy becomes vigorous.

I expect that debt service will soon rise sharply. Productivity will improve, just as happened in the mid-1990s. And the economy will again be vigorous.

Graph #5: The Recent Years
If we want to understand the productivity problem, we have to look at it in context. What context? I suggest we use household debt service for context.

The recent years of debt service show a remarkable drop from the late-2007 peak. Debt service fell rapidly, to a sharp down-spike at the end of 2012.

After the bounce-back from that down-spike, the path of debt service was different. The rapid decline had ended. It had reached a bottom. It was running flat.

If you look, you can see that debt service since the beginning of 2013 shows a fairly smooth curve. The curve bottoms out just at the end of 2014, then starts to rise.

To my eye, debt service drifted downward less quickly in 2014 than 2013, then turned and started drifting upward in 2015. Started drifting upward last year.

Curse the luck, the debt service data ends with 2015. We don't have first- and second-quarter 2016 numbers that let us see what's really happening. But I think 2016 will drift upward a little more than 2015, continuing the pattern that began at the start of 2013.

And I think that after 2016 debt service will rise even faster. That's when we'll start to feel the vigor. That's when we'll see the improved productivity. Here: I mirrored the curve on this next graph to show the kind of future I expect:

Graph #6: Our Near Future?
Just to give you an idea.

I should say, though, that if debt service rises as far and as fast as this graph suggests, then the recession bar after 2025 will be even wider than what the graph shows, and the recession more severe than the last one.

But you take my point: If the debt service curve is going down, then going down more slowly, then going up instead of down, then going up more quickly, this is what the graph must look like. And if debt service goes up and up, productivity will improve and the economy will show vigor -- for a while at least.

I took the eight data values for 2014 and 2015 -- the slowly-down-and-slowly-up drift in the curve -- and used those eight values to create a trend line in Excel. The trend line runs into the past and future, to show where debt service will be (and where it would have been) if those eight values determined the path of debt service:

Graph #7: Household Debt Service and the 2014-2015 Trend
The original eight values are shown in red at the end of the blue line, just at the bottom of the U-shaped trend line. Going forward, the U-shaped trend provides an estimate of the future path of the blue line, the future path of household debt service.

Going backward, the U-shaped line is not an exact match to the blue line during its rapid 2007-2013 fall. But the lines are close enough to make you stop and think. And that means the right side of the U-curve, the side that imagines the future, is likely also a pretty good estimate.

Time will tell. In the meanwhile I have to look. I have to see if I understand what's going on. I have to see if I understand the economy.

I made a screen capture of household debt service in the 1990s so we can look at the "dip, bottom, and recovery" (DBR) of that time. It is shown here in place (in the 1990s) as a dotted green line in a black box, overlaid on the original blue line:

Graph #8: Capturing the "Dip, Bottom, and Recovery" of the 1990s
I took that image of the 1990s, with the green dots there, took that image and scaled it up by a factor of 2.5: that is, 2.5 times as tall and 2.5 times as wide. Then I moved it so that the "dip" of the 1990s lines up with the 2007-2013 dip on the blue line:

Graph #9: Looking at Current Conditions as 2½ times the size of the 1990s Conditions
The green dots -- the 1990s data, scaled up by a factor of 2.5 -- the green dots make a very good match to the 2007-2013 downtrend of the blue line. A very good match.

The green dots also suggest that the debt service "recovery" will happen sooner than Excel's U-curve says. This makes me stop and think. Excel's U-curve is based on the most recent two years of debt service data. Only two years of it, but the most recent two years.

Perhaps the debt service recovery will not come as quickly this time as it did in the 1990s. That seems a reasonable conjecture. Excel's U-curve seems to me a better bet than my scaled-up green dots from the 1990s. So I grabbed the image of the 1990s again and stretched it, still 2.5 times as tall but this time 3 times as wide. Three times the duration.

I fitted the green overlay to the blue line as before:

Graph #10: Looking at Current Conditions as 3 times the Duration of the 1990s Conditions
The scaled-up green dots from the 1990s align with the 2007-2013 fall of the blue line as before. And this time, the green dots of the 1990s recovery align quite nicely with Excel's U-curve.

What does it mean, really? Really, it means nothing: It's a prediction. Still, if the prediction turns out to have been correct, it means maybe I do have a pretty good handle on the economy. Time will tell.

It all comes down to prediction on my part.

You don't expect the economy to pick up. You don't expect vigor. You don't expect productivity to rise. I look at debt service in the '90s and say "That pattern is being repeated right now."

"No," you say. "The economy is different since the crisis." And you are right: Different it is. Maybe things won't pick up this time. Maybe the economy will stay as flat as my recent Blogger stats.

But everything I read tells me that people are tired of this washed-out recovery, which is less a recovery than a continuing depression. People are tired of it. People are ready for recovery. Nobody believes me when I say "vigor", but everybody's ready for it.

It will happen. It won't happen because of my charm and wit, but it will happen.

It will happen because people are ready for it. Nobody was ready yet, in 2010. Everybody wanted it, but everybody knew vigor was unrealistic. Today, people don't say vigor is realistic, but everybody wants it. We're not saying vigor is possible, but we're hungry for it.

You know what that is? That's expectations.

Expectations have turned. Can vigor be far behind?


The Excel file for the first three graphs makes use of the FRED series OPHNFB_PC1: Nonfarm Business Sector: Real Output Per Hour of All Persons, Percent Change from Year Ago, Quarterly, Seasonally Adjusted.

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