By Dr. Alan Greenspan, Senior Economic Advisor

With a majority of the work force now vaccinated, and vaccines readily available to those who are not, large corporations across the U.S. have decided that the time to return to the office has come. From banks to technology companies, there seems to be a consensus forming that workers should return to some degree, whether full-time or a hybrid model, by this fall. Unsurprisingly, there has been push-back from employees—according to a May survey conducted by Morning Consult on behalf of Bloomberg News, nearly 40% of the 1,000 adults polled said they would consider quitting their jobs if their employers are not flexible about remote work going forward. While some occupations certainly require a physical presence, the data show that by and large the workers have a valid point. Indeed, what I have found to be a silver lining of the pandemic is that it appears to have engendered a rise in the level of worker productivity.

In the chart below, we see that U.S. nonfarm business productivity fell dramatically in March 2020 as the country shut down in response to the novel coronavirus. However, productivity rebounded to new heights just one month later. By itself, this phenomenon is not all that unexpected. When recession first takes hold, businesses reflexively begin “cutting the fat.” The least productive workers will be culled first, and discretionary spending will be reined in, leaving businesses in a more productive posture in the early periods of a recession even as aggregate output falls. That dynamic was magnified by the extraordinary nature of the pandemic response as low-productivity service industries were shut down en masse.

What is both surprising and encouraging to me is that, after a year of additional data, productivity has yet to show any signs of giving back its pandemic gains. Following a decline in November 2020, I was initially concerned that a reversion in productivity back to the pre-pandemic trajectory was in the offing. But the data show that real output per hour rebounded once again, rising a more than expected 5.4% in the first quarter of 2021, and the year-over-year rate of growth rose 1.5ppts to 4.1%. A further increase is expected for the second quarter when the data are published in August. Whether this higher level of productivity can be sustained as the economy continues to reopen and reassimilate the workers lost since the onset of the pandemic carries important implications for the U.S. economy going forward.

In the big picture, productivity is arguably the most central measure of the material success of an economy. The level of productivity ultimately determines the average standard of living and is a defining characteristic that separates the so-called developed world from the developing world. In the near-term, the path of productivity may be even more important as it could play a crucial role in combatting the inflationary pressures that, for now, appear transitory. A higher level of productivity would allow businesses to maintain their profit margins without raising prices too quickly while also rewarding workers with higher compensation. Indeed, the various instances of worker shortages documented in recent headlines could be alleviated if businesses feel confident enough that productivity gains are lasting and therefore wages can be increased to attract new employees without hurting profits.

To be sure, there are numerous challenges the nascent recovery has yet to confront (pullback of monetary and fiscal support) and new risks emerging (Delta variant, stagnating vaccination rate). For now at least, worker productivity provides an unexpected and encouraging tail wind.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

About the Author

Dr. Alan Greenspan

Dr. Alan Greenspan

Alan Greenspan served five terms as chairman of the Board of Governors of the Federal Reserve System from August 11, 1987, when he was first appointed by President Ronald Reagan. His last term ended on January 31, 2006. He was...
About the Author

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