June 1, 2017
Productivity is the biggest single factor affecting U.S. consumers’ standard of living and the rate at which their spending grows. In turn, rising spending spurs production increases and leads to additional demand for boxes produced by independent converters. Unfortunately, even with 1.3 percent growth during the fourth quarter, last year’s productivity gain amounted to only 0.2 percent, the slowest rate since 2011. Moreover, productivity advanced by only 0.9 percent in 2015 and by 0.8 percent in 2014, according to the U.S. Labor Department. In fact, productivity gains during the current business cycle have not outperformed gains in any of the 11 business cycles since 1947.
Productivity gains occur when output grows faster than labor hours required to produce that output. The chart on this page shows the average annual growth rates of productivity, output, and hours worked for the current and last two business cycles and the average for the 11 business cycles the United States has experienced during the past 70 years. So far during the current business cycle—which began in the fourth quarter of 2007—productivity has grown at 1.1 percent, less than half the 2.7 percent growth rate of the previous business cycle (first quarter 2001 to fourth quarter 2007). In fact, it grew at less than half the 2.3 percent average growth rate achieved over the past 70 years.
One consequence of this faltering productivity growth rate is that national output is lower than it would have been had the earlier, higher rates of productivity growth continued. And one consequence of that forgone output growth is the lost growth in corrugated packaging demand that is associated with it, as there has historically been a close correlation between growth in industrial production and growth in corrugated packaging demand.
One can calculate the difference between the nonfarm business output actually recorded since the end of the Great Recession in the fourth quarter of 2009 with the output that would have been achieved, had productivity grown at the rate associated with the prior business cycle. The chart on Page 6 shows that gap pictorially as the difference between the green solid line, showing current business cycle output growth, and the red dashed line showing the 2.9 percent annual growth that output achieved during the previous business cycle.
The Great Recession had the largest decline in output of any recession in the post-World War II era, dropping a total of 6.7 percent between the fourth quarter of 2007 and the fourth quarter of 2009. Since then, as the Output Trend lines chart depicts, output recovered at an average rate of 2.6 percent per year, the slowest pace of any recovery since World War II. In order to have recovered to the same level of output as would have been achieved by the 2.9 percent output growth of the previous business cycle, output would have had to grow at a 4.5 percent annual rate since the fourth quarter of 2009, instead of the 2.6 percent annual rate recorded to date—1.9 annual percentage points higher.
If we assume that the additional industrial output over the 2010–2016 seven-year period translated directly into additional corrugated shipments, we can calculate the additional demand for boxes that has been lost owing to subpar productivity growth during the recovery phase of this business cycle. We take the actual percentage change in box shipments in each year and add to it an additional 1.9 percentage points. The following year’s box shipments are then calculated using that growth rate instead of the actual rate. Doing this each year since 2009 yields a seven-year total incremental demand of 200 billion square feet of corrugated board! That amounts to a 7.9 percent increase over actual shipments during that period.
The shipments during last year under the higher productivity assumption would have been 52 billion square feet (13.8 percent) greater than the actual shipments of 376 billion square feet. Assuming the average size of a corrugator plant to be 300 million square feet per year and the average size of a sheet plant to be 75 million square feet per year, this incremental demand would have created the need for—or forestalled the need for closure of—some 65 corrugators and 100 sheet plants, using the Fibre Box Association’s average size of each plant type in 2015 and an apportionment of 80 percent of box shipment volume to corrugators, consistent with 2015 FBA data.
The situation only worsens if the long-term 3.4 percent average annual growth rate of nonfarm business output had still prevailed. Instead of 4.5 percent annual growth to make up the output gap, a 5.5 percent annual growth rate would be required to make up the gap … 2.9 percentage points higher instead of the 1.9 percentage-point premium used in this example.
While the past cannot be re-created and there are important structural factors limiting current potential productivity growth, just imagine how different the independent corrugator business would be today if the output increase rate of the previous business cycle could have been maintained for the past seven years.
Dick Storat is president of Richard Storat & Associates. He can be reached at 610-282-6033 or storatre@aol.com.
