Stagflation Ahead?

Repeating a familiar pattern, U.S. nonfarm productivity surged in the fourth quarter as unit labor costs fell, indicating that businesses are making the most of a weak jobs market and squeezing more profit out of each worker.

Not surprisingly, many economists viewed the report as a positive sign. If companies keep earning more money, the logic goes, then the economy's return to growth won't be far behind.

But is that the most likely outcome? Isn't it also possible that if hiring remains soft, a critical mass of those who are still employed -- especially those with a union standing behind them -- will say "that's enough!" and demand more money and benefits from their employers?

If so, that could set the stage for a period when wages and prices rise despite weakness in the overall economy.

Interestingly enough, if you look back at the history of the relationship between productivity and labor costs, the last time we saw a gap between the two as wide as it is now was -- you guessed it -- in the 1970s, before the Great Stagflation.

Although it is too soon to say whether this aspect of our economic history is about to repeat itself, today's allegedly good news from the Labor Department may not be all that it seems.

Comments

[austincompany]

I would agree with the stagflation coming theory. Since most new jobs are created by small to medium sized businesses, the odds of these businesses greatly increasing payrolls over the next few years is not very good. In addition, add in the prospect of higher taxes (due to the ending of the Bush tax cuts on 12/31) and most business owners are not inclined to greatly increase payrolls. With that said, I would predict a return of the 1970's, with higher inflation, high unemployment, higher taxes, low capital investment and low American morale.

[xqqme]

Question:
Wouldn't increased use of current technology do the same thing for productivity?
I've heard it said that the 3 years of tech demand was compressed into 6 months for 2009.

[NOTaREALmerican]

Only union clout left is public sector unions. Americans are too individualistic to understand they alone they are easy prey for the fewer and smarter people who run the world.

Oh well, it's the peasants the keep the King most fully clothed.

[buzzsaw99]

Prospective employers these days expect a great deal yet offer very little.

[austincompany]

"Prospective employers these days expect a great deal yet offer very little."

That's a silly and stupid comment. As an employer, I offer my employees a job with good pay and a safe and secure office/plant environment. Unfortunately, this is not the 1950's where one can find a job with great pay, little hours, full heath care for the employee and family, paid sick leave and holidays and a full pension at 55. If you want that buzzsaw, move to France.

[steve from virginia]

The employment decline means a further decline in retail- level customers. This makes the productivity increase hard to sustain as overall output will tend to decline as soon as inventories build up, again.

A characteristic of this recession has been the long- term decline and fall of the customer, who has been constrained by decreasing wage earnings, increasing credit and other costs and declining wealth. In this environment, the 'haves' (who are employed) become 'have- nots' as their companies fold for lack of paying customers.

[Major Medical]

I don't think there is any doubt that stagflation is coming. And I think it will hit us like a ton of bricks...sometime in 2011.

[Chris]

Inflation is not a risk. The labor pool willing and able to work today is much larger than it was in the 70s. The risk remains deflation as inventory rebuilding ends and spending remains anemic.