Productivity Hit a Wall
Q4 productivity @ -0.6% vs prior +4.1% the 1st decline since the 2001 recession.
Inside the number: Q3 productivity revised down from 4.7% to 4.5% with labor costs falling 0.5% instead of 1.0%. This is contrast to Q4 labor costs rising 3.5% annual, showing that productivity pulled back; labor costs are on the rise and inflation could run rampant (we explain below).
For 2005, productivity increased 2.7%, the smallest increase since 2001. Unit labor cost rose 2.4% in 2005. Therefore, it cost less to produce because efficiency outstripped labor costs for the 5th year in a row.
We believe that a portion of this pullback is a one time event, and that a portion will be permanent.
The pullback is partially much like the Q4 auto sales decline which shrunk Q4 GDP down to 1.1%. Yesterdays January auto sales indicate a potential rebound and we expect Q1 GDP to rebound accordingly.
When productivity pulls back, we are being less efficient is what we are doing, this increases costs. A pullback in productivity gains generally comes from bad planning, laziness, skills deficiencies or limited time constraints.
The current pullback is not from any of the above, it is from hitting an efficiency peak, which means we have hit a wall or barrier.
Material inputs are at an all time high due to lax monetary policy which led to commodities speculation and energy pass through inflation.
To mask this materials inflation effect, labor costs have been marginalized through outsourcing (reduction of benefits costs), globalization (cheap overseas labor at the margin) and workplace IT transformation.
IT transformation is when information technology acts as an agent of change, maximizing efficiencies through MRP, SCM, ERP, JIT and other methodologies.
MRP (materials resource planning), SCM (supply chain management) and ERP (enterprise resource planning) technologies deployed over the last 8 years have finally reached their point of maximum return or efficiency gains.
JIT Just in Time has inventories at an all time low and SCM/ERP has maximized workflow process efficiencies. It now takes only 83 workers to do what 100 did in Q4 of 2000.
When no further efficiency can be gained, inventory is at an all time low, materials costs an all time high and labor cannot be further marginalized other than slave or prison labor, that is an inflection point.
It is the inflection point where no more blood can be squeezed out of the stone.
There is no economic slack left and no further efficiencies to be currently gained. Thus any marginal or nominal increase in demand will cause labor and material inputs to rise.
Any nominal or marginal increase in costs will be priced into the cost of goods accordingly and further inflation will ensue throughout the supply chain.
And from my experience, this is also the inflection point where laziness, bad planning, skills deficiencies and time constraint inefficiencies which were at an all time low, will inevitably start to rise, further adding to the costs.
Inside the number: Q3 productivity revised down from 4.7% to 4.5% with labor costs falling 0.5% instead of 1.0%. This is contrast to Q4 labor costs rising 3.5% annual, showing that productivity pulled back; labor costs are on the rise and inflation could run rampant (we explain below).
For 2005, productivity increased 2.7%, the smallest increase since 2001. Unit labor cost rose 2.4% in 2005. Therefore, it cost less to produce because efficiency outstripped labor costs for the 5th year in a row.
We believe that a portion of this pullback is a one time event, and that a portion will be permanent.
The pullback is partially much like the Q4 auto sales decline which shrunk Q4 GDP down to 1.1%. Yesterdays January auto sales indicate a potential rebound and we expect Q1 GDP to rebound accordingly.
When productivity pulls back, we are being less efficient is what we are doing, this increases costs. A pullback in productivity gains generally comes from bad planning, laziness, skills deficiencies or limited time constraints.
The current pullback is not from any of the above, it is from hitting an efficiency peak, which means we have hit a wall or barrier.
Material inputs are at an all time high due to lax monetary policy which led to commodities speculation and energy pass through inflation.
To mask this materials inflation effect, labor costs have been marginalized through outsourcing (reduction of benefits costs), globalization (cheap overseas labor at the margin) and workplace IT transformation.
IT transformation is when information technology acts as an agent of change, maximizing efficiencies through MRP, SCM, ERP, JIT and other methodologies.
MRP (materials resource planning), SCM (supply chain management) and ERP (enterprise resource planning) technologies deployed over the last 8 years have finally reached their point of maximum return or efficiency gains.
JIT Just in Time has inventories at an all time low and SCM/ERP has maximized workflow process efficiencies. It now takes only 83 workers to do what 100 did in Q4 of 2000.
When no further efficiency can be gained, inventory is at an all time low, materials costs an all time high and labor cannot be further marginalized other than slave or prison labor, that is an inflection point.
It is the inflection point where no more blood can be squeezed out of the stone.
There is no economic slack left and no further efficiencies to be currently gained. Thus any marginal or nominal increase in demand will cause labor and material inputs to rise.
Any nominal or marginal increase in costs will be priced into the cost of goods accordingly and further inflation will ensue throughout the supply chain.
And from my experience, this is also the inflection point where laziness, bad planning, skills deficiencies and time constraint inefficiencies which were at an all time low, will inevitably start to rise, further adding to the costs.
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