The Pandemic's Impact on Productivity Will Be Harsh

As economy slowing re-opens, we are starting to get an insight into some of the lasting effects on productivity. The restrictions regarding social distancing and the need to remain super-vigilant regarding sanitization are going to have a major negative impact on productivity growth. Prior to the advent of the lockdowns, the US economy was slowing and productivity growth was dropping. Some economists were calling this a continuation of a secular decline in output efficiency that took a further notch down starting with the 2008 financial crisis. No one expected this trend would virtually nose-dive, but that is what is likely to take place. Now, with so much of the economy forced to change the way services and industrial production are performed, economic efficiency will be seriously impaired.

Let’s look at just a handful of services that we already know are heavily impacted, for example:

• Medical practitioners will be having fewer patients daily because of social distancing and the need to take time after each patient’s visit to sanitize offices;
• Air travel will take more time as passengers are screened prior to boarding, and airlines must deal with restrictions that adversely affect load factors;
• Hospitality services of all type must conform to social distancing restrictions that are expected to see revenues way below historic averages;
• All forms of personal services involving direct contact with clients are going to underperform due to social distancing and related restrictions; and
• Professional sports will be forced to perform in empty stadiums foregoing revenues from seat sales and concessions.

Put differently, these limitations on “normal “behavior will be a profound drag on wages and corporate profits.

Economists prefer a more comprehensive measure of productivity ---- total factor productivity. This measures the effect of the combination of workers and capital in generating output. Capital, in this instance, includes all types of inputs used by workers from physical machinery to computer software. It is one of the best measures to capture the sources of economic growth. US total productivity performance varies widely but, on average, for the last decade it barely reached 1% a year. As the chart indicates, we will be entering a period of falling productivity growth at every level as labor and corporations go back to work in the midst of this pandemic.

Chart 1 Total Productivity U.S, 1980-20

Source: Federal Reserve Bank

The implications of a decline in total productivity are profound. Potential growth, a measure of the economy’s capacity to expand, is lowered. With that, job creation will be lower, the labor force growth will likely decline because of discouraged workers and unemployment will be elevated. Those investors who anticipate a rapid recovery from the coronavirus shutdown need to step back and re-examine the importance of productivity growth as we move forward.