In an effort to meet the rising demand from customers, Batesville Tool & Die embarked on a quest to recruit 70 individuals for employment last year. This endeavor proved to be quite challenging. Convincing factory workers to relocate to a small community of 7,300 residents nestled in the Indiana countryside was no easy task, especially when competing against prominent manufacturers like Honda and Cummins Engine in the vicinity.
The scarcity of job seekers was evident.
Jody Fledderman, the CEO, remarked, “You could count on one hand how many people in the town were unemployed. It was just crazy.’’
Despite its best efforts, Batesville Tool & Die was only able to fill 40 of the available positions.
Enter the era of automation. The company made strategic investments in machinery capable of emulating human labor and in cutting-edge vision systems that enabled its robots to visually comprehend their tasks.
Similar narratives to that of Batesville have unfolded repeatedly across the United States in recent years. Persistent labor shortages have prompted numerous businesses to turn to automation to compensate for the tasks that remain unfilled. Concurrently, they have focused on upskilling their existing workforce to leverage advanced technologies, thereby enhancing productivity.
This shift has led to an unforeseen surge in productivity, offering insight into a notable economic conundrum: How has the largest global economy sustained robust growth and low unemployment despite enduring significantly high interest rates aimed at curbing inflation, which traditionally precipitates a recession?
To economists, robust productivity growth serves as a potent elixir. When companies integrate more efficient machinery or technology, their employees can elevate their productivity levels, thereby increasing output per hour. Consequently, companies can enhance profits and elevate wages without necessitating price hikes, thereby maintaining inflation at bay.
Austan Goolsbee, the president of the Federal Reserve Bank of Chicago, likened the surge in productivity to “magic beanstalk beans for the economy,” elucidating how accelerated productivity fosters faster income escalation, wage growth, and GDP expansion without instigating inflation.
Joe Brusuelas, the chief economist at RSM, noted, “The last time we saw anything like this was the late 1990s.”
During that period, a surge in productivity, catalyzed by the widespread adoption of laptops, cellphones, and the internet, empowered the Federal Reserve to sustain low borrowing rates while effectively managing inflation despite a flourishing economy and job market.
Presently, the Federal Reserve’s series of aggressive rate hikes — totaling 11 since March 2022 — have succeeded in curbing inflation from a 9.1% four-decade high to 3.1%, with minimal adverse economic effects.
Sal Guatieri, a senior economist at BMO Capital Markets, expressed incredulity at this outcome, stating, “I would have said it’s not possible. But that’s exactly what happened.”
Approximately a year ago, the prevailing consensus among economists was that an impending recession was virtually inevitable. In 2022, Fed Chair Jerome Powell had cautioned that combatting inflation would inevitably lead to “some pain” in the form of widespread layoffs and heightened unemployment.
However, by the recent past, Powell’s tone had shifted. With unemployment hovering marginally above a fifty-year low, Powell informed the press, “We’ve had a very strong labor market, and we’ve had inflation coming down.”
While Powell underscored the Fed’s commitment to further mitigating inflation, the institution’s optimism regarding inflation’s trajectory toward its 2% target has resulted in a halt in rate hikes since July, with expectations of multiple rate cuts in the ensuing year.
Arguably, the most plausible rationale for this economic resilience lies in the heightened efficiencies achieved by entities like Batesville Tool & Die over the past year. Prior to the resurgence in productivity growth, a prevalent rule of thumb dictated that average hourly wages could only escalate by a maximum of 3.5% annually to align with the Fed’s 2% inflation target. This would imply a reduction in the current roughly 4% average annual wage growth. However, the enhanced productivity landscape has altered this equation, affording greater flexibility for sustained wage growth without instigating inflationary pressures.
Guatieri elaborated, “A lot of that pressure on business finances — that normally causes them to raise prices — has been offset by strong productivity growth.”
During a recent press briefing, Powell was asked whether heightened productivity elucidated the economy’s continuous expansion amidst dwindling inflation.
“That’s one way to look at it — yeah,” Powell concurred.
The productivity upsurge signifies a marked departure from the pre-pandemic era, characterized by an average annual productivity growth of around 1.5%, as per RSM’s assessments. The economic landscape underwent a seismic shift as it rebounded vigorously from the 2020 pandemic-induced recession, with businesses grappling to rehire the multitude of workers they had previously laid off.
The ensuing labor shortage precipitated a surge in wages and inflation, exacerbated by logistical challenges faced by factories and ports due to escalating consumer demand. Consequently, many enterprises turned to automation, accelerating investments in equipment, research and development, and other forms of intellectual property. The dividends of this efficiency drive began materializing nearly a year ago, with labor productivity escalating at an annual pace of 3.6% from April to June, 4.9% from July to September, and 3.2% from October to December.
At Reata Engineering & Machine Works, CEO Grady Cope acknowledged that “efficiency was kind of forced on us.” With the labor market in overdrive, the Englewood, Colorado-based company encountered challenges in recruiting at the requisite pace. Simultaneously, clients began resisting price hikes.
Consequently, Reata integrated robots and other cutting-edge technologies to enhance productivity. Software automation streamlined the process of delivering price quotes to customers, reducing the timeline from two weeks to a mere 24 hours.
Numerous economists and industry insiders express optimism, albeit cautiously, regarding the sustainability of the productivity surge. They highlight the nascent penetration of artificial intelligence (AI) across factory floors, warehouses, retail outlets, and offices.
Peter Doyle, CEO of Hirsh Precision, emphasized, “Right now, AI is not a critical enabler for us; it’s an assistant and accelerator in certain roles. The world is still trying to understand what AI is capable of doing and how quickly it will advance.”
Preliminary evidence suggests that AI holds the potential to perpetuate the productivity gains. A study conducted last year by Erik Brynjolfsson of Stanford University, alongside Danielle Li and Lindsey Raymond of the Massachusetts Institute of Technology, monitored 5,200 customer support agents at a Fortune 500 company who leveraged a generative AI-based assistant in 2020 and 2021. The AI tool provided recommendations for customer interactions and access to pertinent internal resources.
Employees utilizing the chatbot exhibited a 14% surge in productivity compared to their counterparts who did not utilize the tool. They handled more calls and concluded them at an accelerated pace, with the most substantial productivity enhancements — 34% — observed among the least experienced and skilled workers.
While automation often evokes concerns regarding displacement of human workers and ensuing job losses, historical trends suggest that technological advancements ultimately generate more jobs than they displace. Human intervention remains indispensable for constructing, upgrading, repairing, and operating sophisticated machinery. Some displaced workers undergo retraining to transition into these roles, a process likely facilitated by the retirement of the substantial baby boomer cohort, contributing to labor scarcities.
A fraction of the current productivity surge can be attributed not only to advanced technology but also to a more content workforce. The tight labor markets of recent years empowered Americans to switch jobs, securing roles with superior remuneration and job satisfaction, thereby augmenting productivity.
One such individual is Justin Thompson from Kalamazoo, Michigan, who experienced burnout in his previous occupation as a police officer, characterized by arduous 16-hour workdays.
Thompson’s spouse stumbled upon a job listing for an operations manager position at a charter airline. Despite lacking prior aviation experience, Thompson’s spouse believed his skills honed as a Marine Corps infantryman — specializing in mission logistics during deployments in Iraq and Afghanistan — would be transferrable.
This intuition proved accurate, as Omni Air International hired Thompson in 2019.
Thompson, aged 43, expressed his affinity for his new role, which affords him the flexibility to work remotely when not traveling. His military experience, particularly in streamlining operational efficiency, has been invaluable. Leveraging technology, Thompson carries a laptop, iPad, and mobile printer during his travels, utilizing proprietary software to manage logistics.
Numerous individuals have transitioned from low-skilled positions to higher-paying, more productive roles.
RSM’s Brusuelas noted, “The people who were rolling tacos on Dec. 31, 2019 … yeah, they’ve moved up. They’re doing other things and making a lot more money.”
At Reata Engineering, employees received training to operate sophisticated equipment. A 19-year-old staff member, concurrently a university engineering student, utilized AI tools to streamline the company’s training materials, rendering them less cumbersome and time-intensive.
Cope, the CEO of Reata Engineering, emphasized, “The whole point is not to lay people off. The point is to make people do jobs that are more interesting” — while concurrently enhancing remuneration.
