®
Market Analysis, Research & Education
OCTOBER 29, 2009
A unit of Fidelity Management & Research Company
Productivity – Output per Hour of All Persons
(1953-2009)
Productivity Gains
Surprisingly Strong
2008-‘09 Recession: A Break From the Past
Productivity grew at an annualized rate of 6.6% during Q2 2009—the fastest pace since the economic
recovery in 2003 (see chart). This large bounce in productivity was unusual because it occurred during the
recession, and suggests that businesses were quick
to cut labor costs during the economic slowdown.
5
0
Mar-07
Mar-04
Mar-01
Mar-98
Mar-95
Mar-92
Mar-89
Mar-86
Mar-83
Mar-80
Shaded regions show U.S. recessions as defined by the National Bureau of Economic Research. Productivity is represented by nonfarm
business sector output per hour of all persons. Source: Bureau of Labor Statistics, Haver Analytics, FMRCo (MARE) as of 6/30/09.
of productivity growth had previously turned negative in
every U.S. recession dating back to the early 1950s (chart).
The higher level of productivity growth this time around
shows that businesses slashed payrolls and cut costs
even faster than output declined during the recession.
• Worker productivity rose during the recent recession as companies reduced labor costs at a faster
rate than their revenues declined.
Swift cost-cutting has contributed to a rebound in
corporate profits during 2009. During the first two
quarters of 2009, sales declined by a collective $68
billion for all of the companies in the S&P 500® Index, yet net income increased by a total of $285
billion.i This increase in profitability shows that, despite shrinking top-line revenues, companies regained
profitability due largely to adept cost-cutting.
• Higher productivity growth leaves companies
leaner and better positioned to boost profits and
potentially add workers as the economic recovery
takes hold.
While the productivity gains thus far have accrued
to companies (profits) and not workers, productivity growth provides a more auspicious backdrop for
employees. In theory, as businesses become more
KEY TAKEAWAYS
Mar-77
Mar-74
Mar-71
Mar-68
Mar-65
Mar-62
Mar-59
Historically, recessions have been accompanied by drops in productivity...
-10
Leaner Companies Poised for Higher Profits?
In fact, despite the severity of the 2007-2009 recession, the
rate of productivity growth stayed flat-to-positive throughout the downturn. By comparison, the annualized rate
...but businesses
adapted more
quickly to the
recent recession
-5
Mar-56
Over the long-term, growth in productivity—a measure of
total output per unit of labor (i.e. hours worked)—is what
ultimately drives real economic growth for developed
economies, such as the United States. However, the rate of
productivity is cyclical, and typically has declined at the beginning of past recessions because businesses were slow
to lay off workers and cut costs as the economy contracted.
Historically, in the early stages of a recovery when the
economy emerged from a downturn and output picked up,
the lower cost base has resulted in accelerated growth in
the amount of output per worker (increased productivity).
10
Mar-53
Recessions Typically Hinder Productivity
Quarterly Change at Annualized Rate (%)
Cost-cutting leaves firms leaner
as outlook improves
In comparison with previous recessions, productivity growth held up well during the recent recession.
15
profitable they are more likely to provide higher compensation, and to potentially hire more workers. In
addition, should domestic economic growth continue
to improve, some companies that aggressively cut labor into the downturn may discover they reduced their
labor forces too much, prompting them to rehire.
Investment implications
The recent recession caused a dramatic decline in corporate revenues, but it appears that many companies
were able to cut costs at a faster rate, which has allowed
them to return to profitability. With companies leaner and
better positioned to boost profits, continued productivity growth may make them more likely to expand their
businesses and rehire workers as the economic recovery
attempts to gain traction. A continuation of the trend in
higher productivity growth would likely provide a positive backdrop for corporate profits, stock prices, and the
values of other economically sensitive asset classes.
®
Market Analysis, Research & Education
OCTOBER 29, 2009
A unit of Fidelity Management & Research Company
The Market Analysis, Research and Education (MARE) group, a unit of Fidelity Management & Research Co. (FMRCo.), provides timely analysis on developments in
the financial markets.
Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.
Past performance is no guarantee of future results.
[i] Source: FactSet, FMRCo (MARE) as of 6/30/09.
The S&P 500®, a market-capitalization-weighted index of common stocks, is a registered service mark of the McGraw-Hill Companies, Inc. and has been licensed for use by Fidelity Distributors Corporation. All
indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot
be made in any index.
Brokerage products and services and workplace savings plan products and services offered directly to investors and plan sponsors provided by Fidelity Brokerage Services, Member NYSE, SIPC, 900 Salem
Street, Smithfield, RI 02917.
Investment and workplace savings plan products and services distributed through investment professionals provided by Fidelity Investments Institutional Services Company, Inc., 82 Devonshire Street, Boston,
MA 02109. 535479.1.0