Increase in productivity pushes companies' profits up

MAXTON, N.C. —A revolution inside the Campbell Soup plant here helps explain why corporations are piling up huge profits — with little need for more people or new equipment.

In the plant, workers such as "Big John" Filmore, a 28-year Campbell veteran, huddle daily with management in situation rooms before their shifts to find ways to save money for the company. The plant's 858 workers turn out a billion meals a year.

Growth in productivity, the output produced in an hour of work, has been the secret for strong corporate profits over last year. Productivity grew at an annualized 3.4 percent over the last five quarters.

That is similar to the 3.7 percent gain in the first five quarters after the so-called jobless recovery of 2001-03, but research by San Francisco Fed vice president John Fernald and senior economist Daniel Wilson shows a striking difference.

Wilson concluded that so-called total factor productivity, which captures gains from workers and equipment simply working harder and smarter, rather than being replaced by new equipment, rose at a 2.9 percent annual rate in this recovery. That's almost a percentage point more than in the last recovery. The data suggests companies are using the equipment they have more intensively and intelligently, Wilson said in an interview.

"There is a big story in why we in the U.S. have been so innovative," former Fed Chairman Alan Greenspan said in an interview. "American business for generations has sought ideas from the shop floor. We learn from everybody in the operation, not only from the plant hierarchy."

Phelps says productivity growth works in long waves. In boom times, companies stock up on equipment. In lean times, they find ways to maximize performance of that equipment.

That's a headwind for those who hope for new hiring. Productivity growth pushes back the time when companies feel the need to start hiring.

"When the productivity growth comes, then watch out because that is when companies start not needing so much labor," Edmund Phelps, a Columbia University economist and Nobel laureate, said in an interview.

Data released Nov. 18 by the Bureau of Labor Statistics shows that while firing has slowed, hiring hasn't picked up.

Unemployment in Robeson County, which hosts the Maxton plant, was 11.1 percent in September. The factory sat near a town center with a dry fountain last month and a clock on the town hall told the wrong time.

Dave Biegger, Campbell vice president for North America supply chain, says the reward for workers' contributions to efficiency is a stable job and more business.

On a new Swanson Broth line at the Maxton plant, equipment operators, working with the line's mechanics, have numbered each gasket to avoid confusion and speed up repairs. They've cut windows into machinery covers so they can see wear on the belts and replace them before they break, as well as color-coding valve handles to avoid confusion in settings.

"We have to collaborate at the highest levels of the organization right down to the plant floor," said Biegger, who built a 20-person team whose sole aim is to find cost improvements. "You explain, you teach, you coach, and then you allow the work to evolve through the creativity and commitment of the team. And then we push ourselves to stretch beyond what we believe is possible."

Greenspan said the companies need to keep innovating or the current burst of cost-saving will run its course and profit margins will shrink.

"When markets shut down, and capacity expansion comes to a halt, companies direct all of their capabilities toward harvesting untapped cost-saving innovations accumulated during the previous boom," said Greenspan, who now works as a private consultant in Washington.