I’ll unusually begin this morning’s report on the final (for now) third quarter U.S. labor productivity figures with the usual productivity caveat: This concept is one that most economists admit is among those they understand least. So you can be pleased that according to this gauge, the efficiency of the nation’s non-farm businesses increased at an annual rate of 2.20 percent, not the 1.60 percent rate previously reported. You can be worried that this pace is considerably lower than the second quarter’s 3.50 percent and is relatively low historically speaking. (See the chart below.) Or you can dismiss all of the above as meaningless or even misleading (if you believe that these figures mostly fail to capture the efficiency gains from new technologies).
I lean toward taking the government’s numbers seriously but first, let’s recall that these labor productivity data tell us how much inflation-adjusted output the economy or a particular sector is generating for all the hours put in by its workforce. As such, it’s a narrower look at productivity than multi-factor productivity (also called total factor productivity), which compares production with many more inputs (like capital, energy, and materials)
In addition, the labor number treats the offshoring of production as a productivity gain – which certainly isn’t the kind of efficiency improvement that any rational person would applaud. (This error is corrected in the multi-factor data.) At the same time, the labor productivity figures are much more current than their counterparts, so for better or worse, they attract more attention.
The monthly labor productivity reports are also useful for presenting data on labor costs, which in turn can reveal whether American workers’ pay is finally (depending on your point of view) showing signs of life, or dangerously inflating. The final third quarter number (again for non-farm businesses) came in at a 2.40 percent annual advance. Like the productivity figure, that was much better than the previously reported result of 1.40 percent. But it was still the slowest quarterly annualized rate since the third quarter of last year and, as the chart below makes clear, unimpressive even compared with its extremely volatile history.
The labor productivity story in manufacturing was much better; in fact, the sector seems to have regained its status as the economy’s clear productivity growth leader after a shaky 2012-2014 period. The new Labor Department report shows a 5.10 percent final third quarter annualized gain – much higher than the non-farm business rate and one that was revised up from 4.90 percent. As a result, labor productivity growth has now grown faster in manufacturing than in the non-farm business sector as a whole for three of the last four quarters.
Just as important, manufacturing’s latest labor productivity increase was its fastest since the third quarter of 2011, and, as indicated by the chart below, in respectable territory historically.
Real hourly compensation trends in manufacturing were also far more encouraging than in the economy overall. The final third quarter figures peg its annual increase at 5.80 percent – much faster than both the previously reported 4.20 percent and than the non-farm business rate. This third quarter performance was also pretty solid historically.
So assuming these productivity data are generally on target, the implications for policymakers seem pretty clear: If you really want a more productive American economy, you’ll be working overtime (and of course productively!) to help grow America’s manufacturing.