Productivity, as I’ve repeatedly noted, is considered one of the most mysterious aspects of economics. Even most economists agree. And with the recent release of new, detailed government data on manufacturing productivity, the subject got even mysterious-er. At the same time, if these figures are reliable (and many smart folks insist they aren’t), then worries about weakening manufacturing’s productivity performance just received important new justifications. And claims that domestic manufacturing has been renaissance-ing just took on lots more water.
Just to remind, productivity is important because it’s one of the key determinants of American living standards. Broadly speaking, if American businesses and their employees can figure out how to do more with less, the companies will find it much easier to pay their workers more without sacrificing profits. Moreover, higher pay flowing from greater efficiency doesn’t fuel inflation.
Also to remind, the government follows two measures of productivity. Its labor productivity reports come out each quarter, and therefore attract the most attention. They tell us how much the economy turns out for each hour a worker works. The multi-factor productivity (also called total factor productivity) reports take longer to compile, largely because (as the names suggest) they look at a much wider variety of inputs (like spending on new equipment and fuel and parts and components). Also important to remember: The labor productivity numbers tend to be distorted (to the upside) by the simple offshoring of output (and labor). That’s clearly not the kind of productivity improvement that strengthens the American economy. The multi-factor productivity figures aren’t biased in this way.
What the Labor Department released late last month was its most recent look at the multi-factor performance for 86 different manufacturing sectors and two transportation-related sectors. Because of that time lag I mentioned, the new numbers only take the story up to 2013. Even given this lag, though, the picture is anything but encouraging.
There’s a ton of information in this study, and its predecessors, and I’ll probably return to the report in upcoming posts. But for now what seems most important to me is how the numbers of manufacturing industries that have achieved multi-factor productivity growth have changed over time. Essentially, this number isn’t growing. Chart 4 tells the story.
It looks at this subject over more than a quarter century, and at first glance, over time, there doesn’t seem to be much of an underlying trend. In 1987, 50 of the manufacturing industries studied achieved greater multi-factor productivity. In 2013 only 38 did, but in between, the number bounces all over the place.
As usual, though (and as the Labor Department points out), the best way to look at economic data is to examine it as it changes during the economy’s main cycles – its recessions and its expansions. So it’s important to recognize, as the report notes, that during this period, “the number of manufacturing industries with growth in multifactor productivity was highest in 2003 and 2010. These were years of economic growth following recessions.” So, by the way, was 1992, and manufacturing’s multi-factor productivity was pretty good then, too.
But comparing these post-recessionary years generates a more discouraging conclusion. As is evident from the chart, the multi-factor productivity bounceback in manufacturing – at least measured by the number of sectors where it grew, has been decidedly weaker following the last recession than it was after its early 1990s predecessor. The latest rebound is also weaker than that following the early 2000s recession – though multi-factor productivity fared better after that downturn than after the 1990s slump.
An optimist could reply that 26 years is a pretty short time span, and that more definitive conclusions require looking at longer periods – and that’s an entirely reasonable position to take. And again, major questions do surround the reliability of productivity data. But what it also means is that these optimists face the burden of proof to show that productivity in American manufacturing isn’t facing serious challenges.