As made clear once again yesterday by two releases of significant statistics, American manufacturing under the Trump administration remains a puzzling good news/bad news story.
Yesterday, as reported here, the Federal Reserve came out with industrial production data for July showing that domestic industry’s real output growth has sped up during the Trump Era, and remains strong even in those metals-using industries supposedly suffering because of the President’s metals tariffs. These findings are also consistent with figures showing that manufacturing employment under this administration has growing faster than overall employment – increasing its share of the latter from 8.49 percent in February, 2017 to 8.55 percent last month.
But yesterday also saw the issuance of new labor productivity data, and it contained new evidence that manufacturing has changed from a leader in U.S. labor productivity growth to a serious laggard. And that’s entirely consistent with the dismal performance being turned in by manufacturing wages lately.
The latest labor productivity figures (the narrower of the two measures of efficiency tracked by the Labor Department, but the one for which results are published on by far the timeliest basis) provide the preliminary results for the second quarter of this year. They’re the first indication of serious troubles for manufacturing. Quarter-to-quarter, industry’s labor productivity improved by 0.9 percent on an annualized basis, and that was its best such performance since the whopping 4.4 percent jump registered for the fourth quarter of last year (and which, for reasons to be discussed below, seems to have been a major outlier).
But labor productivity for all non-farm businesses (the Labor Department’s U.S. economy’s productivity universe) rose by 2.9 percent sequentially at an annual rate – its best such performance since the first quarter of 2015 (3.1 percent).
Manufacturing’s laggard status showed up in the first quarter revisions, too. Here it’s important to observe that, as of today, these numbers have been revised twice since the initial statistics were released in early May. As is normally the case, the following month, new estimates for that time period came out. But yesterday, as it not normally the case, the Labor Department’s first report on the second quarter includes sweeping revisions of the Labor Department data that go back all the way to 1947! And these include yet another set of figures for the first quarter.
So here’s how the estimates of sequential annualized labor productivity growth have changed since May:
Non-farm business Manufacturing (both annualized)
1Q 2018 preliminary +0.7 percent +0.5 percent
1Q 2018 1st revision +0.4 percent -1.2 percent
1Q 2018 final (for now!) +0.3 percent -1.0 percent
2Q 2018 preliminary +2.9 percent +0.9 percent
Any way you cut it, manufacturing’s recent labor productivity growth has trailed that of all non-farm businesses. And since manufacturing is a part of that non-farm business category, non-manufacturing non-farm businesses exceeded manufacturing’s labor productivity growth by an even wider margin.
Now let’s perform the same exercise looking at labor productivity growth for the last three economic recoveries (including the current, ongoing expansion). As known by RealityChek regulars, comparing similar stages of the economic cycle is the best way to get the most reliable long-term insights.
Non-farm business Manufacturing
1990s expansion (2Q 1991-1Q 2001) last pre-big revision estimate:
+23.25 percent +45.86 percent
1990s expansion latest: +23.77 percent same
bubble expansion (4Q 2001-4Q 2007) last pre-big revision estimate:
+16.03 percent +30.23 percent
bubble expansion latest: +16.60 percent same
current expansion: (2Q 2009 to present): (as of preliminary 1st quarter estimate)
+9.70 percent +9.69 percent
as of first 1st quarter revision: +9.62 percent +8.28 percent
latest (as of big revision 1st quarter estimate) +9.43 percent +8.36 percent
2d quarter preliminary estimate: +10.21 percent +8.61 percent
The bottom line here: The latest big revision confirms earlier findings that during the current recovery, manufacturing has lost its labor productivity lead, mainly because its labor productivity growth has slowed down compared with that of previous recoveries much more dramatically than the labor productivity growth in non-farm businesses.
As of the first quarter, this relative manufacturing slowdown was not quite as significant as previously thought. But the preliminary second quarter figures show that it’s regained major “momentum.”
Measuring productivity growth if of course still one of the most controversial exercises in economics. But it’s also still the case that the profession hasn’t come up with an alternative that’s attracted widespread support. So the safest assumptions continue to be that American manufacturing’s productivity slump is dragging on, and that until it’s reversed, American manufacturing wages will keep disappointing.