Think of the kind of face you make when you’ve just eaten something that tastes awful. That’s the kind of face you should make upon reading the Labor Department’s new report on the widest measure of American productivity growth. Because the nation’s performance on this crucial front last year puts its efforts to foster greater efficiency – and therefore sustainably higher living standards – right back in the toilet.
As now well known by all long-time readers of RealityChek, these figures – on multi-factor productivity (MFP) – show how well the economy takes a wide range of inputs (including human labor, capital, energy, and materials) and turns it into the output of goods and services. The big drawback is that because this gauge is so much more complicated to calculate than labor productivity alone, it comes out much less frequently than the latter.
Nonetheless, because we’re still in the first quarter of the current year, the new MFP numbers are timelier than usual, offering a preliminary look at 2015. And they make clear that, as with labor productivity, the major slump in multi-factor productivity that began at the turn of the century keeps deepening.
Between 1995 and 2000, according to the Labor Department, the average annual growth of multi-factor productivity peaked at 1.50 percent. (These data only go back to 1987, and the statistics I focus on here are for non-farm businesses.) During the bubble expansion that followed, through 2007, this rate slowed to 1.40 percent. Once the economy began tanking, however, MFP’s average annual growth rate plunged to 0.40 percent. And unusually, once the current recovery began, MFP gains didn’t bounce back much at all.
Since 2008, MFP has grown by more than one percent annually only once – in 2010 (early in the recovery). In 2013, it actually fell slightly (by 0.10 percent), improved to a still blah 0.70 percent the following year, and in 2015, dropped back to 0.20 percent.
The only possible bright spot in the report was the annual increase seen in how capital-intensive the rise in MFP became. Every year since 2010, capital’s role in MFP gains had either flat-lined or actually decreased – results that are consistent with claims that the current economic recovery has been slowed in large part by unusually weak business investment. But in 2015, capital’s role rose by 0.40 percent.
During this expansion, the American economy has demonstrated that it can grow modestly after receiving historically unheard of amounts of stimulus from the president and Congress and, much more important, the Federal Reserve. If the economy wants to show the ability to grow without incurring the massive resulting debts, much faster gains in both labor and multi-factor productivity are essential.