The good economic news today was that the government released more full-year 2015 data that gives us a better fix on where the U.S. economy stands. The bad economic news was that both the labor productivity figures and factory orders numbers show that a continuation of the historically sluggish recovery is about the best foreseeable future that Americans can hope for.
The productivity report was the most disturbing, since improvements in this measure of efficiency are the nation’s best hope for improving living standards in a sustainable way. Just to review, economist measure productivity in two ways – by gauging labor productivity (which tracks how much inflation-adjusted output is generated for each hour on the job put in by American workers) and by studying multi-factor productivity (which tells us how efficiently employers make use of a wide variety of inputs, like capital and energy and materials, as well as labor).
The productivity statistics released this morning were the labor productivity data, which come out quarterly. (There’s a longer time lag with the multi-factor results). And these preliminary numbers for the fourth quarter of 2015 were awful. For non-farm businesses – the broadest category examined – output per hour fell from third quarter levels at an annualized rate of 3.04 percent. That’s the biggest such sequential drop since the first quarter of 2014’s 3.54 percent – which was dragged down in part by the harsh winter.
During the course of 2015, the year-on-year quarterly change dropped from a 2.51 percent gain in the first quarter to 1.37 percent in the fourth quarter. Now, to be fair, that first quarter pickup was juiced by the very low number recorded for that weather-affected first quarter of 2014. But the fourth quarter, 2015 yearly gain was also smaller than those for the second and third quarters. And the third quarter’s previously reported sequential improvement was revised down from 2.20 percent to 2.10 percent.
Moreover, the longer the time frame you examine, the worse this productivity performance looks. For all of 2015, labor productivity rose by a mere 0.60 percent over 2014 levels. That’s a deceleration from 2014’s underwhelming 0.70 percent, though it beat 2013’s literal flat-line.
Since the labor productivity data go way back, it’s possible to compare its growth during the last three economic recoveries – the best way economists know to get apples-to-apples figures. During the 1990s expansion, which lasted from the second quarter of 1991 through the first quarter of 2001, labor productivity increased by 23 percent even. During the 2000s expansion, which ran from the fourth quarter of 2001 through the fourth quarter of 2007, the gain was 16.09 percent – a somewhat faster annual rate. But for the current expansion, which began in the second quarter of 2009, a total labor productivity improvement of only 6.22 percent has been recorded.
As usual, the story with manufacturing labor productivity is better, but only because the rest of the economy has set such a low bar. Its efficiency by this measure fell by only 0.38 percent between the third quarter and the fourth quarter. That’s also, though, its worst drop-off since the first quarter of 2015 (0.60 percent), when the winter also depressed economic activity. And it’s a much slower quarterly increase than the 4.86 percent surge for the previous three-month period, which was revised down slightly.
On an annual basis, however, manufacturing labor productivity gained momentum during 2015 – rising from 1.16 percent between the first quarter of 2014 and the first quarter of 2015, to 1.51 percent between the fourth quarter of 2014 and the fourth quarter of 2015. For the full year, labor productivity in manufacturing increased more than twice as fast as in the overall non-farm economy – by 1.30 percent versus 0.60 percent.
During the last three recoveries, manufacturing labor productivity’s advance has also been much stronger than that of the rest of the economy. During the 1990s expansion, it rose by 46.71 percent – more than twice the rate of the growth for all non-farm businesses. During the shorter 2000s expansion, no one’s idea of a golden age of U.S. manufacturing, it improved even at a faster annual rate – 41.03 percent total. During the current expansion, which is only slightly longer than its predecessor, manufacturing labor productivity has led the nation’s as well, but it’s up by only 24.89 percent. At the same time, the slowdown is much less dramatic than that suffered by the rest of the economy, so the manufacturing productivity premium has widened.
What a shame, then, that the sector is on the verge of a recession – which typically is a productivity killer. We’ll look at the latest evidence for a manufacturing slump – the new full-year factory orders data – in the next post!
P.S. Don’t forget that when it comes to labor productivity, the numbers are somewhat misleading, especially in manufacturing since, as I’ve explained previously, the way the Labor Department calculates these numbers results in the offshoring of production contributing to productivity growth. Labor is aware of this problem, but the old methodology remains in place.