Job growth totaled 235,000 last month and has increased 1.6 percent over the last year. With the unemployment rate a historically low 4.7 percent, the pace of job gains could slow.
This means for real GDP growth to accelerate from its current subpar 2 percent trend, then productivity growth would have to make up the difference. Why? By definition, real GDP growth essentially equals the sum of productivity growth and employment growth.
{mosads}Hence, for the economy to grow at the 3 percent-plus rate we envision in the four quarters between Q3 2017 and Q2 2018, productivity would almost certainly have to improve.
In Q3 1997, the unemployment rate fell below 5 percent (4.9 percent), and it continued to decline for the next several years. The unemployment rate made a cyclical low in Q4 2000 (3.9 percent) and was at only 4.2 percent in Q1 2001, when the economy entered a very mild recession in the following quarter.
Over the fourteen quarters between Q3 1997 and Q1 2001, nonfarm productivity expanded at a 2.8 percent annualized pace. This was nearly one full percentage point faster than the 1.9 percent annualized growth rate between Q1 1991, when the previous recession ended, and Q3 1997, when the unemployment rate broke 5 percent. What can we learn from the 1990s business cycle?
One, the unemployment rate fell below 5 percent in Q1 2016 (4.9 percent), so there is precedence for the rate to remain under that level for some time. If we match the 1990s expansion, the rate could remain low for another 10 quarters (including the current one). This would take us to Q2 2019.
Two, productivity growth can pick up sharply even when unemployment is low. Productivity grew at a 1.0 percent annualized rate from Q2 2009, when the recession ended, to Q4 2015, which was the quarter before unemployment broke below 5 percent.
In the four quarters since, productivity has continued to grow at 1.0 percent. But as the unemployment rate moves lower, companies may have to find ways to use their labor more efficiently, thereby resulting in a cyclical lift in productivity.
In the late 1990s, the proliferation of the internet, i.e, the “dot com boom”, was the key factor behind the pickup in productivity growth. In this cycle, we believe the driving force will be a shift towards pro-business policymaking.
In particular, regulatory relief and corporate tax reform, including a substantially lower corporate tax rate and full expensing of capital outlays, should boost business spending. This series peaked for the cycle thus far in Q3 2015, and has been a major drag on growth since then.
Thus, we need business outlays to improve. Additionally, the generalized recovery in oil prices should provide a tailwind to energy investment. Over time, as the economy’s capital stock recovers, aided by the administration’s pro-growth business stance, productivity gains are expected to buoy GDP growth above 3 percent, at least for a period of time.
Joseph LaVorgna is the managing director and chief U.S. economist for Deutsche Bank. He is a regular contributor on CNBC.
The views expressed by contributors are their own and not the views of The Hill.