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The buzz on productivity

By HELEN HUNTLEY
Published February 19, 2006

Talk about a balancing act: We want the economy to grow and we want to create more jobs. But the first better be happening faster than the second or we're headed for trouble.

Productivity - how much we produce for every hour worked - is a key measuring stick for the economy. When the government said this month that productivity growth had slowed, we wondered what was going on.

In the first decline since the recession of 2001, the productivity of the American workplace fell in the fourth quarter of 2005 by an annualized rate of 0.6 percent. For all of last year, productivity increased 2.7 percent - well below the gains of the past three years.

High productivity growth in recent years has enabled corporations to enjoy strong profits growth, absorb higher energy and material prices, and raise wages without pushing up core consumer prices at about 2.2 percent a year, says Peter Morici, a business professor at the University of Maryland.

But now, one question is on the lips of many, and even appears in U.S. News & World Report this month in a headline: "Has productivity peaked?"

Not at Aerosonic Corp., said Mark Perkins, executive vice president of the Clearwater manufacturer of aircraft parts.

"Over the last couple of years the units produced out of here have been increasing and we have not added people to do it," he said. Some new machinery has helped, he said, "but to get much further, we're having to change some of our manufacturing techniques."

Last week the company had a representative in from Cessna, one of its largest customers, to offer suggestions on improving the manufacturing process.

True productivity isn't a matter of how busy you are; it's what you are accomplishing. So at Aerosonic, the goal isn't getting employees to work harder, but setting things up so they're able to work more efficiently.

"Giving people a reasonably efficient process to deal with improves morale," Perkins said. "If you can't get parts when you need them, that hurts. If you know you could do better but the system doesn't let you, that's frustrating."

At Jabil Circuit in St. Petersburg, they've got productivity tracking down to a science.

"That's in our culture in a big way," said Bill Peters, the company's Americas president. Jabil manufactures a variety of electronic products for customers such as Nokia and Hewlett-Packard Co.

"We track our yields on an hourly basis and have corrective action meetings on a daily basis," he said. "You're never satisfied. Every one of our lines has those meetings every day."

But by traditional measuring sticks, Jabil's U.S. manufacturing may appear less productive than it once did, he said. Jabil has been shipping production offshore to China, Malaysia, Brazil, Mexico and other countries in Asia and Europe.

"We've moved out more of the volume business, which is typically higher productivity business, and we're left here with more complex products," Peters said. "I might be building 20,000 cell phones a day in China and it's the same phone. In the United States I'm building 15 different products on the same assembly line in one day. It's highly complex, changing over and customers stopping me because they want to put different parts on.

"We're probably building products smarter and more efficiently than we were before, but the data wouldn't show it," he said.

Has productivity peaked at Jabil? "No," Peters said. "We measure ourselves against the theoretical best that our process can do." No matter how well things are going, there are always goals for improvement, he said.

Of course productivity is easier to measure in a manufacturing environment. But what about services?

"Technology is continuing to make us more efficient and that's not going to stop," said Stanley Levy, partner with the public accounting firm Grant Thornton in Tampa.

"For corporate tax returns, rather than bringing work papers back to the office, we've designed the computer system so we can do the returns in the field at the client's office," he said. "We couldn't have done that four years ago. BlackBerrys, computers, everything's making us more productive. I think we're going to get to a new level."

Technology continues to improve the way information is compiled, analyzed, stored and shared in a wide variety of fields.

It has produced huge productivity improvements in retailing and wholesale distribution, said University of Florida economics professor David Denslow.

"Bar codes keep day-to-day control of inventory and keep delivery trucks full," he said. "They're routed more efficiently so you need fewer drivers."

Plastic is now the preferred currency for retail transactions. At a growing number of stores, you don't even have to sign your name for transactions of less than $25, speeding up the checkout line.

And, of course, if you can get the customer to do work you've been paying someone to do, productivity takes a big leap. We went from self-service gas pumps to bank ATMs and online banking and now we are getting self-service checkout lanes at stores such as Wal-Mart and Home Depot.

Advances in technology hold out promise for continued productivity improvements in health care, particularly in diagnostics and record keeping. The new Pepin Heart Hospital & Dr. Kiran C. Patel Research Institute in Tampa calls itself the first all-digital cardiovascular facility in the Southeast. The hoped-for result: physicians will be able to make faster, better-informed and more cost-efficient decisions because information will be instantly available to them whether they are inside or outside the hospital.

Some productivity improvements come at workers' expense.

In recent years, Raymond James Financial has fired more than 1,000 brokers who were generating less than $150,000 a year in commissions and fees for the St. Petersburg company. Many were semiretired or were part-timers who have other businesses such as selling insurance or doing tax returns. They've been replaced by higher producers; $250,000 in production is the minimum to affiliate with Raymond James' independent contractor subsidiary.

It's just as much work to supervise the less productive workers as the better performers, according to Tom James, chairman of Raymond James. As securities regulations have multiplied, so has the cost of supervising brokers to make sure they are in compliance.

Some jobs and labor-intensive industries seem more resistant to productivity improvements.

"In the construction industry, I think productivity has gone down," said Jerry Shaw, senior vice president of Opus South Corp., which is building huge condo projects in St. Petersburg and Clearwater.

"There's just so much demand for the labor," he said. "It's difficult to get a full crew and when you do, the turnover is much higher. Not having a full crew slows down the whole project. If you have a $100-million project and you get delayed a couple months, that costs a lot of money."

Shaw said periodic materials shortages and hurricanes have hurt productivity on Florida projects.

"It's very challenging in the construction industry today," he said.

Will productivity improve in the future? He thinks so.

"The labor market will seek equilibrium," he said. "It will come back to be more of a balanced situation."

Economists say the fourth-quarter decline in productivity by itself isn't anything to worry about.

"The numbers bounce around quite a bit quarter to quarter," said Scott Brown, senior economist at Raymond James & Associates in St. Petersburg.

Karsten Jeske, a research economist at the Federal Reserve Bank of Atlanta, said falling car sales skewed the productivity numbers for the fourth quarter.

"A lot of car sales that didn't happen in the fourth quarter are happening now," he said. That portends strong first-quarter economic growth, which in turn should boost the productivity numbers, he said.

Last year's decline in productivity improvement from the torrid pace of 2002 to 2004 was no surprise to economists.

"Primarily it's a maturing of the business cycle," economist Denslow said. After the 2001 recession, productivity soared because companies increased their output without hiring more workers, a phenomenon labeled the "jobless recovery." The economy is growing, but companies are hiring more workers, which means productivity is increasing more slowly.

"This is largely a return to trend," Denslow said. "With any luck," we should be able to achieve a more normal pace of productivity gains in the neighborhood of 2.5 percent a year.

Ben Bernanke, the new chairman of the Federal Reserve, agrees. On Thursday, he said he expects U.S. business productivity growth to bounce back in the first quarter after a fourth-quarter slowdown.

Helen Huntley can be reached at hhuntley@sptimes.com or 727 893-8230.

[Last modified February 17, 2006, 21:19:02]