Ed Yardeni Ponders Stagnant Demand And Weak Productivity

A Benjamin Cole post

Ed Yardeni, of Yardeni Research, is one of those names that have banged around U.S. macroeconomic circles for generations, always grounded in the numbers for his observations.

So why the cruddy productivity numbers of late?

Here’s Yardeni, from his last blog post:

Another possible explanation is that, from a supply-side, companies are highly productive. The problem is that in a world of secular stagnant demand growth, their unit sales aren’t strong enough to show off their productivity. You may have the most efficient widget factory in the world, but if no one wants widgets, your productivity is zero. Consider the following:

 Lots of capacity. There are lots of industries and companies with too much unproductive capacity. Some have expanded too much with the help of cheap credit. Some have been disrupted by competitors using new technologies. I just can’t find too many industries that haven’t spent enough money on plant, equipment, and technology. Indeed, the industrial capacity utilization rate has dropped to 75.4% during June from a recent peak of 78.9% in November 2014. What’s puzzling is that the employment rate (which is the flip side of the official unemployment rate) has risen to 95.1% from 94.2% over this same period.

Yardeni is correct, the world is glutted with capacity, a glut that appears to be worsening, and also glutted with capital to make new capacity if needed. Yardeni is right that weak demand will drive down output per worker. It may also be that labor is cheap enough in the USA—with people returning to the labor force—that raising productivity is not a priority for American businesses.

Central Banks Out of Ammo?

Seeing what the federal government accomplishes, domestically and offshore, many fear more federal spending as a form of stimulus.

That throws stimulus-backers back on our central bank to boost demand.

With interest rates low already, likely lowering rates more can only do so much, although they should be lowered.

The real choices come back to QE or helicopter drops.

Sikorksy Time

The Fed is not out of ammo, but it lacks resolve.

What to make of it when a Michael Woodford, or a Ben Bernanke, or a Lord Adair Turner says helicopter drops will work—but the Fed will not send in the choppers? Bernanke says chopper drops will work, but should be a last resort.

But why not now? What is the point of perennially soggy growth and low productivity, and the Japanification of the Western World?

Why not a few years of boom times, and then deal with whatever inflationary consequences there may be, if any?