Productivity growth is universally lauded by the economics, business, and political worlds as any country’s best hope for healthy expansion and rising living standards. How odd, then, that the Labor Department’s first data on U.S. multi-factor productivity performance in 2013 attracted almost no attention when it was released on Wednesday. It’s even stranger because multi-factor productivity is a far broader measure than labor productivity (which the Department reports on each quarter, to decent fanfare).
As suggested by the label, multi-factor productivity figures attempt to show the output effects of all types of economic inputs on growth – including technological innovation, capital spending, returns to scale, and other efficiency improvements, as well as workers’ contributions. Moreover, thanks to this comprehensive nature, multi-factor productivity growth hasn’t been distorted – and in fact, overestimated – due to job offshoring the way labor productivity growth has been.
It would be great to write that this new Labor Department data paints an encouraging picture of strong multi-factor productivity growth for the private nonfarm business sector – which the Labor Department considers the headline figure. But it would also be completely inaccurate. Instead, the numbers show that this gauge of economic efficiency increased last year by a measly 0.3 percent – the worst national performance since the 0.3 percent decline in 2009, half of which was a recession year. The private business sector’s results, which include farms (agriculture service providers are counted as non-farm businesses), were only a little better. Its multi-factor productivity increased by 0.7 percent. That’s better than the 0.6 percent rise in 2011, but below 2012’s 1.4 percent improvement.
Indeed, slowing multi-factor productivity growth has been the American way since the mid-1990s. From 1995 to 2007, this measure’s compound annual growth hit 1.4 percent for that private nonfarm sector – much faster than the 0.5 percent gains registered from 1987 to 1995. But from 2007 – which ended with the onset of the Great Recession – through last year, multi-factor productivity’s annual compound growth fell back to 0.6 percent, and the 2012-13 average was only 0.3 percent.
One big reason has to be a return to low levels of capital intensiveness of multi-factory productivity’s inputs — which represents more evidence of a serious recent lag in business investment in new plant, equipment, and technology. This capital intensity measure did rise last year for private non-farm businesses by 0.3 percent, in contrast to its declines in 2011 and 2012. But since the mid-1990s, capital intensiveness has been falling markedly. During the last half of the 1990s, it was growing by an annual compound rate of 3.7 percent. During the bubble-ized recovery of 2000-2007, that pace fell to 3.2 percent. Since 2007, the last year before the Great Recession, it has sunk to two percent.
Worse, in retrospect, the late-1990s witnessed a major technology bubble, meaning that the surge in capital intensiveness literally shouldn’t have happened. It looks like the economy’s natural rate is considerably closer to those latest anemic figures – which in turn are no higher than those for the late 1980s, despite the vaunted technology revolution that began shortly thereafter.
Capital-intensive industries and growth are supposed to be the strong suits of advanced, high-income economies like America’s – largely because they are high income countries and therefore should be able to generate abundant capital or at to least access it. The noteworthy multi-factor productivity slowdown detailed in the Labor Department’s new report is yet another sign that America’s recovery from that Great Recession has been way too dependent on policy smoke and mirrors.