Increased efficiency – Good for earnings, Bad for workers

Posted by Don on November 6, 2009

I gave a theory of mine a couple of weeks ago in my article, High unemployment here to stay for a while, regarding how in my opinion a lot of managers use layoffs as a means of letting go their least productive employees.  The Productivity numbers for the third quarter came out today and it’s looks like my theory may be correct.

Productivity for the third quarter rose at an annualized rate of 9.5% over the previous quarter and was up 4.3% over the same quarter in 2008.  Even better was the manufacturing sector productivity rose at a rate of 13.6% from the prior quarter.

If you are an investor you should be extremely happy because this efficiency gain has provided the boost to earnings from last quarter. The average company was able to get the same amount of income in Q3 with 9% less employees than in Q2.  While this is good for businesses this only means that businesses will have to receive even more orders before they need to hire additional employees in the future which will keep unemployment high for a while.

Good news also came out today in that Initial Jobless Claims came out this week in the amount of 512,000 down 20,000 from last week and continuing claims were 68,000 less than the previous week (seasonally adjusted).  That being said several new layoff announcements were made this week by companies like Microsoft and Johnson & Johnson.

Unfortunately the lesson learned by business is that they can get buy with fewer employees for the time being which should put hiring plans on hold for the near future.  This should not affect the economy much worse since the Senate just approved an additional extension of unemployment benefits.