It’s the Economy, Stupid

The Labor Department today reported that business productivity surged to a revised 4.3 percent annual rate in the second quarter of the year. That’s impressive. It’s nearly double the 2.2 gain previously reported. It’s also well ahead of forecasts. So why did stocks tumble and the Dow Jones Industrial Average fall more than 300 points?

Because it’s finally dawning on investors that Americans don’t have the purchasing power to keep the economy going. A separate report today from the Department shows a steadily weakening labor market. The number of U.S. workers filing new claims for jobless benefits jumped by 15,000 last week, to a seasonally-adjusted 444,000. That’s much higher than anticipated. We’ll know tomorrow whether employers continued to shed jobs in August, as they’ve done in the prior seven months.

Remember, productivity measures hourly output per worker. When firms lay off their workers or cut the number of hours they work, the firms often get more output per hour from them. This is often because employees are pushed harder to generate more output in fewer hours — understanding that if they don’t, they’ll be the next ones on the chopping block. Or because each who remains is overseeing more machinery than before. (This may result in lower-quality products and services, but the productivity figures don’t measure quality of output.)

Higher productivity keeps inflation in check. When companies can produce more stuff with fewer workers, their unit costs drop. And they face even less pressure to raise wages — even in the face of rising costs of living — because average employees have virtually no bargaining power. This also helps boost corporate profits.

But this also means less purchasing power by consumers whose paychecks are getting even smaller and jobs even less stable, and who have reached the end of their lines of credit because the housing bubble has burst. The result? Employers can’t sell as much as before, so they reduce their payrolls by cutting hours and laying off more workers.

Retailers are the canaries in this mine. Their sales are sharply down. (Today Nordstrom and other retailers posted big disappointments for August sales.)

Unless or until America’s broad middle class has more money in its pockets — because we get a more progressive tax system, because unions become more powerful and push prevailing wages upward, because employers finally understand what Henry Ford understood a century ago (unless workers have enough money to buy the products they’re making, the products won’t sell) — this downturn is likely to last a long time.

 Originally published at Robert Reich’s Weblog and reproduced here with the author’s permission.

2 Responses to "It’s the Economy, Stupid"

  1. Anonymous   September 6, 2008 at 1:27 pm

    Until the American consumer learns to put quality and support for the domestic worker before the Low Price Guarantee, retailers will compete to undercut each other with minimal wages, minimal staffing, and minimal cost imported goods. Until the unions organize world-wide (esp. China), efforts to squeeze domestic manufacturers will only close down domestic management. The goods will still come from the lowest-cost manufacturer, whether it’s branded IBM or Lenovo (just one example).How do we afford to “buy American”? Start by maximizing your own productivity and minimize costs: grow a garden, share the ride, cut the TV cable, eat less meat.Then look for local labels: “made in USA”, when you can find it. If you can’t keep your dollars in the US, “made in Canada/Mexico” helps our neighbors. “Made in E.U.” helps our friends.Consumers vote, with every purchase, for the world they want to live in.

  2. Barack Obama   September 7, 2008 at 12:25 am

    Anonymous … you do realize that the profits from low price goods don’t go to our colony … errr … China but mostly US businesses. And the “low price” is for not only American consumers but for the world to buy American branded goods at a cheap price (more profits for America.) If there were unions that would protect worker’s rights worldwide, it’s the US that would suffer the most. Profit margins would decrease and American goods would be more expensive globally. Americans with college degrees with dreams of a white-collar job (financed by those huge profits from cheap production in China) can now dream of working on the assembly line. There’s no shortage of wealth in America. In fact, there have been a incredible amount of millionaires and billionaires in this country in the past 8 years. But appearantly trickle-down economics isn’t working so well for the rest of the country.What Americans need to do is be more patriotic and help US businesses, not only by buying ‘Made in America,’ but by reducing the minimum wage to 0.40¢ an hour and sacrificing for American businesses and corporations.