Wall Street Journal / Life - Entertain

Margin Pressure Ahead for U.S. Companies

Productivity growth is companies’ best weapon against rising costs. Unfortunately for them, it has been extraordinarily weak and is unlikely to get much better.

By

Justin Lahart

Productivity growth is companies’ best weapon against rising costs. Unfortunately for them, it has been extraordinarily weak and is unlikely to get much better.

Productivity is the secret sauce of a strong economy. The more workers can produce, the faster the economy can grow—a situation that tends to be good for workers and employers alike, who typically share in a growing pie. A big part of why the U.S. economy has been so disappointing in recent years is that productivity growth has been so scant.

Figures released by the Labor Department on Wednesday showed that productivity, as measured by how much the typical worker produces in a typical hour, has grown at just a 0.6% annual rate over the past five years. The only time on record when productivity’s trend was weaker was during the dismal period that spanned the late 1970s through the early 1980s.

A big part of why productivity has been so weak is that, for years now, companies have been hesitant to invest in the new plants and equipment that could help them operate more efficiently. Some of this probably reflected worries about whether the returns those investments generated would be strong enough, compounded by investor demands that companies dedicate more of their cash toward dividends and share buybacks. Weak wage growth also may have taken away some of the urgency to buy labor-saving equipment.

Now, though, plenty of companies probably wish they had some of that equipment in place. Labor costs are rising, and with the unemployment rate at its lowest level in over decade, workers are harder to come by. But unfortunately for the companies, boosting productivity isn’t as simple as buying a new piece of equipment and plugging it in. You have to integrate it into your operations, and train your workers how to use it, both of which take time.

Moreover, while profit growth has been strong lately, it has been driven mainly by multinationals’ overseas operations, with domestic profit growth slowing. The problem is that, when profits weaken, companies’ knee-jerk tendency is to go into cost-cutting mode rather than to buy equipment that might boost efficiency in the future.

This suggests that companies will continue to struggle to find offsets for higher costs, kicking themselves for not investing more in the past while still hesitating to invest more for the future.

Write to Justin Lahart at justin.lahart@wsj.com

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