WASHINGTON — Batesville Tool tries to keep up with customer demand & It started last year by looking for seventy people. It wasn’t easy. Attracting factory workers to a community of 7,300 people in rural Indiana was difficult, especially because it had to compete with major nearby manufacturers such as Honda and Cummins Engine.
Job seekers were scarce.
“You could count on one hand how many people in the city were unemployed,” says Jody Fledderman, the CEO. “It was just crazy.”
Batesville Tool & It managed to fill only 40 vacancies.
Enter the robots. The company invested in machines that could mimic human workers and in vision systems, which allowed the robots to “see” what they were doing.
The Batesville experience and others like it have been repeated numerous times in the United States in recent years. The chronic labor shortage has led many companies to invest in machines to do some of the work for which they cannot find people. They have also trained the workers they need to use advanced technology so they can produce more with less.
The result was unexpected productivity growthwhich helps explain a major economic mystery: how the world’s largest economy has managed to stay so healthy strong growth And low unemploymentDespite brutally high interest rates that are intended to curb inflation, but usually cause a recession?
For economists, strong productivity growth offers an almost magical elixir. When companies roll out more efficient machines or technology, their employees can become more productive: they increase their production per hour. The result is that companies can often increase profits and raise workers’ wages without having to jack up prices. Inflation can remain under control.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, has likened rising productivity to “magic beanstalk beans for the economy.” … You can achieve faster income growth, faster wage growth and faster GDP without generating inflation.”
Joe Brusuelas, chief economist at tax and consultancy firm RSM, said: “The last time we saw something like this was the late 1990s.”
That’s when a boost in productivity — an early payoff to the sudden embrace of laptops, cellphones and the Internet — allowed the Federal Reserve to keep interest rates low as inflation remained in check even as the economy and labor market roared .
This time around, the Fed’s aggressive series of rate hikes – 11 of which began in March 2022 – have managed to cool inflation from a four-decade high of 9.1% to 3.1%, with little economic hardship was caused.
“I would have said it’s not possible,” said Sal Guatieri, senior economist at BMO Capital Markets. “But that’s exactly what happened.”
A year ago, almost every economist warned that a recession was all but inevitable. Fed Chairman Jerome Powell himself warned in 2022 that beating inflation would inflict ‘some pain’ in the form of widespread layoffs and higher unemployment.
Last month, Powell sounded a different note. With unemployment barely above half-century lows, the Fed chairman told reporters, “We’ve had a very strong labor market and inflation has come down.”
He did warn that the central bank wants to see further progress in slowing inflation. Yet the Fed is so optimistic that inflation will move toward its 2% target that it has not raised rates since July and is expected to cut rates several times this year.
Perhaps the most likely explanation is the greater efficiency that companies like Batesville Tool offer & They have managed to achieve something in the past year. Before productivity started growing again last year, the rule of thumb was that average hourly wages could rise no more than 3.5% annually to keep inflation within the Fed’s 2% target. That would mean that the current average annual wage growth of roughly 4% would have to shrink. But higher productivity has changed that equation: there is now more room to keep wage growth high without fueling inflation.
“Much of the pressure on corporate finances – which normally causes prices to rise – has been offset by strong productivity growth,” Guatieri said.
At a news conference this month, Powell was asked whether he believed higher productivity helps explain why the economy has continued to grow steadily even as inflation has fallen.
“That’s one way of looking at it, yes,” Powell replied.
Productivity growth marks a sharp shift from pre-pandemic years, when annual productivity growth averaged around a tepid 1.5%, according to RSM calculations. Everything changed when the economy emerged from the 2020 pandemic recession with unexpected force, and companies struggled to rehire the many workers they had lost.
The resulting labor shortage caused wages to rise. Inflation also soared as factories and ports buckled under the pressure of rising consumer orders. Shortages of parts arose.
In desperation, many companies turned to automation. Investments in equipment and in research and development and other forms of intellectual property have accelerated. The efficiency gains started coming almost a year ago. Labor productivity increased by 3.6% year-on-year from April to June, by 4.9% from July to September and by 3.2% from October to December.
At Reata Engineering & Machine Works: “Efficiency was more or less forced on us,” says CEO Grady Cope. With the job market buzzing, the Englewood, Colorado-based company couldn’t hire fast enough. Meanwhile, customers began to refrain from paying higher prices.
That’s why Reata installed robots and other technology to produce more with less. Software allowed it to automate the delivery of quotes to customers. Previously, that process took two weeks. Now it can be done within 24 hours.
Many economists and businesspeople say they are hopeful, if not certain, that productivity growth can continue. They note that artificial intelligence is only just beginning to penetrate factory floors, warehouses, stores and offices.
“At the moment, AI is not a crucial factor for us; it is an assistant and accelerator in certain roles,” said Peter Doyle, CEO of Hirsh Precision, which makes parts for the aerospace and medical device industries. “The world is still trying to understand what AI is capable of and how quickly progress will be made.”
Early evidence suggests AI could support productivity gains. A study last year by Erik Brynjolfsson of Stanford University and Danielle Li and Lindsey Raymond of the Massachusetts Institute of Technology tracked 5,200 customer support agents at a Fortune 500 company who used a generative AI-based assistant in 2020 and 2021. suggestions for dealing with customers and links to useful internal documents.
Those who used the chatbot were found to be 14% more productive than colleagues who did not use the tool. They handled more calls and completed them faster. The biggest productivity gains – 34% – came from the least experienced and least skilled workers.
Automation tends to create fears that machines will replace human workers, destroying jobs. Some workers displaced by robots often struggle to find new work and ultimately settle for lower wages.
Yet history shows that, in the long run, technological improvements actually create more jobs than they destroy. People are needed to build, upgrade, repair and operate advanced machines. Some displaced workers have been trained to get such jobs. And that transition will likely be eased this time by the retirement of the large baby boom generation, causing labor shortages.
Some of today’s productivity gains may come not only from advanced technology, but also from more satisfied employees. Tight labor markets over the past three years have allowed Americans to change jobs and find others that pay better and make them happier and more productive.
One of them was Justin Thompson of Kalamazoo, Michigan, who felt burned out from his job as a police officer, with its 16-hour work days.
“I literally ran myself into the ground,” he said.
Thompson’s wife saw an opening for operations manager at a charter company. Even without aviation experience, his wife felt he could use the skills he acquired as an infantryman in the Marine Corps – handling the logistics for missions – during tours in Iraq and Afghanistan.
She was right. Omni Air International hired him in 2019.
Thompson, 43, said he loves the new job, which allows him to work from home when he’s not traveling. And his maritime experience – including developing ways to improve efficiency – has proven invaluable. Technology also helps: Thompson travels with a laptop, iPad and mobile printer and uses proprietary software to manage logistics.
Other workers have moved from low-skilled jobs to jobs that pay better and are more productive.
“The people who were running tacos on December 31, 2019… yes, they went a step further,” said Brusuelas of RSM. “They do different things and make a lot more money.”
At Reata Engineering, employees were trained in the use of new advanced equipment. A 19-year-old employee, a university engineering student, has used AI tools to make companies’ training materials less cumbersome and time-consuming.
“The whole point is not to fire people,” says Cope, the CEO of Reata Engineering. “It’s about people doing jobs that are more interesting” – and also pay better.