Business Seems To Have Used Covid To Clean House In Fundamental Ways

Productivity – output per hour – surged during the summer quarter. That should hardly surprise.  After spring’s lockdowns and quarantines, the leap in business activity that accompanied the summer re-opening brought idle resources back on line with all the attendant efficiencies associated with such trends. According to the Department of Commerce, all business output expanded at a dramatic 43.7% annual rate during the summer months, while hours worked expanded at a still strong but much slower 35.1% rate.  Output per hour accordingly jumped at an historically strong 6.4% annual rate. 

If all this news seems straightforward enough (except of course the drama of the large numbers), the detail of the Commerce Department report reveals something truly unusual: businesses seem to have used the time of lockdown and quarantine to raise their operating efficiencies fundamentally. During the spring quarter, for instance, business cut back on hours some 42.4% at an annual rate, much faster than they had to cut back on output, which fell at a nonetheless still steep 36.8% annual rate. Output per hour accordingly picked up, surging at a 9.6% annual rate. This pattern is very different than is usual during recessions and other business downturns. Typically at such times, business cuts back on hours only reluctantly, causing productivity to collapse into the recession. Whether business managers saw Covid as something lasting or the economic constraints were more obvious in this circumstance than is usually the case in recessions, managers adjusted fast.  

Comparisons over the past year tell the same story. The hole into which the economy fell last spring was so deep that even with the striking summer pickup in sales, all business output remains some 3.2% below year-ago levels. But hours worked are 7.2% lower than this time last year so that output per hour, despite all the trials of the pandemic, has risen an historically fast 4.3% over the 12 months to this past September.

How business accomplished this unusual trick has two parts. One is the use of technology. Clearly, retail and food sectors had failed to apply already available technologies. The immediate and intense pressures brought by the medical emergency impelled them to act more decisively than they had to date. Restaurants and retailers quickly availed themselves of the delivery features facilitated by the internet, while the circumstances of social distancing forced them to adopt kiosks or similar arrangements for ordering on site. With air travel difficult and medically risky for employees, service firms turned to on-line ways of communicating, cutting down on otherwise unproductive travel time. At the same time, work-from-home in many cases turned what formerly was commuting time to more productive work. And these are just a few of the more obvious answers, all of which held back the hours needed to produce a given level of output. 

Businesses also seem to have managed their layoffs with considerable care. In deciding who would remain and who would not in the pandemically pressured situation, managers went with their most capable workers. Since presumably these workers are better paid than others, those choices are apparent in the hourly compensation data also recently made available by the Commerce Department. Hourly compensation in all businesses this summer quarter was 6.7% above year-ago levels. This is a remarkable increase, about five-times the rate of inflation in fact. It did not occur because business simply gave everyone a hefty raise. That would be unlikely in any environment and especially under the pressures imposed by the medical emergency. Rather the compensation hike reflected the bias in favor of ability and so presumably higher average pay among those who remained on the job.

Manufacturing was the only business sector to buck these trends. Although manufacturing has led American business for years in the application of robotics and artificial intelligence (AI) and so also in productivity growth, its output per hour has risen at only a modest 0.7% rate over the past year. Hours deployed in manufacturing operations fell about in tandem with output. This would present a troubling picture were it not for two additional considerations: First, manufacturing has so led the rest of American business in technological applications that it, unlike retailing and services, had few unused systems to apply when the pressures of the pandemic arrived. Second, manufacturing was less flexible in the particular pressures of the medical emergency than were other areas of business. It is not as if a manufacturing operation could, for example, tap work-from-home options. The picture is less that the rest of business left manufacturing behind and more that it began to catch up with it.

Looking forward, it is unlikely that business will keep up the recent pace of productivity growth. In fact, there is a good chance that it will give some back. As the economic re-opening continues raising levels of business activity, mangers likely will have to scramble for staff to meet sales demands and the new hires will detract from average levels of ability. Business will, however, likely keep some recent gains, from the new ways of doing business they have developed and from the technological applications especially.