How Robots Saved the US Economy

Due to a persistent lack of workers, many businesses have had to invest in machines to perform some of the labor that has to be done by humans. In order to produce more with less labor, they have also been teaching the employees they do have how to use cutting-edge technology.

The outcome has been an unanticipated surge in productivity, which contributes to the explanation of a major economic enigma: how has the largest economy in the world continued to grow at such a rapid pace and have such low unemployment in spite of extremely high interest rates that are meant to control inflation but usually trigger a recession?

Strong productivity growth is seen by economists as a near-magical cure. Employee productivity can rise when businesses use more advanced machinery or technological solutions, resulting in an increase in hours worked. As a consequence, businesses may frequently increase earnings and pay for staff without having to raise prices. It is possible to contain inflation.

The Federal Reserve Bank of Chicago's president, Austan Goolsbee, has compared the economy's rising productivity to "magic beanstalk beans." It is possible to achieve quicker GDP growth, faster wage rises, and faster income increases without creating inflation.

Joe Brusuelas, chief economist at the tax and consulting firm RSM, likened the current economic situation to that of the late 1990s, stating, "The last time we saw anything like this was the late 1990s." During that period, a surge in productivity, attributed to the widespread adoption of laptops, cellphones, and the internet, enabled the Federal Reserve to maintain low borrowing rates. This occurred despite a booming economy and job market, as inflation remained under control.

Federal Reserve's Success in Taming Inflation

This time, the Fed has successfully cooled inflation from a four-decade high of 9.1% to 3.1% while incurring little economic pain thanks to its aggressive streak of rate rises, 11 of which began in March 2022.

Almost all economists were predicting that a recession was almost certain a year ago. In 2022, Fed Chair Jerome Powell himself issued a warning, stating that overcoming inflation would cause "some pain" in the form of increased unemployment and massive layoffs.

Powell was striking a different note at the end of last month. The Federal Reserve Chair told reporters, "We've had a very strong labor market, and we've had inflation coming down," with unemployment slightly over a half-century low.

He did issue a warning, stating that the central bank is looking for further progress in reducing inflation. The Fed hasn't hiked rates since July and is predicted to do so several times this year, however, because of its extreme optimism that inflation will approach its 2% target.

The most plausible answer might be the increased efficiency that businesses like Batesville Tool & Die have accomplished over the last year or two. It was generally believed that for inflation to keep within the Federal Reserve's 2% objective, average hourly pay could increase by no more than 3.5% yearly prior to productivity starting to expand again last year. That would need a reduction in the current average yearly salary rise of about 4%. However, increased productivity has altered that equation, giving pay growth greater room to rise without causing inflation to spike.

Based on RSM's calculations, the productivity boom represents a significant departure from the pre-pandemic years, when yearly productivity growth averaged a meager 1.5%. Everything changed when the economy unexpectedly surged out of the 2020 pandemic recession and firms found it difficult to rehire the large number of people they had let go.

Wages surged as a result of the ensuing labor scarcity. Along with a boost in consumer orders, manufacturers and ports also experienced an increase in inflation. Parts became scarce.

Many businesses resorted to automation out of desperation. Equipment purchases, R&D expenditures, and other intellectual property investments surged. About a year ago, the efficiency payoff started to show results. Between April and June of last year, labor productivity increased at an annual rate of 3.6%, followed by 4.9% from July to September and 3.2% from October to December.