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If there were two of me, I could have reported yesterday on both the new industrial production figures from the Federal Reserve and the new labor productivity data from the Bureau of Labor Statistics (BLS) that came out. Because progress in cloning tech has been incredibly disappointing, and since Washington keeps often pairing such releases, I had to choose one (the former). But the latter’s importance should never be forgotten, especially since it shows manufacturing’s performance on this crucial front has actually deteriorated, at least in a relative sense. This development, in turn, has big implications for President Trump’s tariff-heavy trade policies.

After all, these Trump levies, whether on metals or on products from China, increase cost pressures at various stages of individual companies’ production process or at various stages of industry supply chains when (as they often do) they cross national borders.

As a result, the companies involved can respond with various combinations of the following measures: They can increase the prices they charge to their customers (whether they’re other businesses, in the case of inputs used in producing goods and services, or consumers, in the case of the kinds of products sold by retailers). They can find alternative sources of supply (which rarely happens right away). They can eat the higher costs, and accept lower profits, in hopes of preserving market share. Or they can improve their productivity, and therefore offset the impact of higher costs through improved efficiency.

That last option is (which involves more than simple cost-cutting) is the best for the economy, including for workers, in the long run, since it’s a time-tested formula for boosting growth and living standards on a sustainable basis. But manufacturing’s deteriorating record in this regard indicates that American industry overall is failing this test.

To remind, labor productivity is the narrower of the two such measures of efficiency tracked by the BLS. It simply reveals how much of a particular good or service can be produced by the relevant workforce (adjusted for inflation) per each hour on the job. As the name implies, the broader measure, multi-factor productivity (also called total factor productivity) measures output per worker hour as a function of the use of many different inputs – e.g., capital and energy, as well as labor.

The manufacturing labor productivity lag becomes clear upon examining the latest results. It’s true that the sector’s first quarter sequential growth (at an annual rate) was revised up from 0.4 percent to 1.1 percent. But the comparable figure for non-farm businesses (BLS’ definition of the American economic universe for productivity measurement purposes) was much better – a 3.4 percent annualized gain revised up to 3.5 percent.

The gap widened further in the second quarter, at least according to yesterday’s preliminary results. Non-farm business labor productivity rose again, albeit at a slower 2.3 percent annual rate. But in manufacturing, labor productivity actually fell in absolute terms – by 1.6 percent at an annual rate.

Even more alarming are the longer-term trends, which are especially visible thanks to the labor productivity revisions going back to 2014 released by the Labor Department along with the preliminary second quarter results. Here are the pre-revision results for the last three economic expansions, including the one still ongoing, through the first quarter of this year. (RealityChek regulars know that the most useful economic analyses compare results during similar stages of the business/economic cycle.)

                                                                           Non-farm business   Manufacturing

1990s expansion (2Q 1991-1Q 2001):                 +23.74 percent      +45.86 percent

bubble expansion (4Q 2001-4Q 2007):                +16.59 percent     +30.23 percent

current expansion: (2Q 2009 thru prev 1Q19):    +12.18 percent        +9.59 percent

These numbers demonstrate how the growth rate of labor productivity in manufacturing has slowed much more dramatically than that of the overall non-farm business sector.

Here are the results for the current expansion incorporating the revised first quarter figures:

                                                                          Non-farm business    Manufacturing

1990s expansion (2Q 1991-1Q 2001):               +23.74 percent        +45.86 percent

bubble expansion (4Q 2001-4Q 2007):              +16.59 percent        +30.23 percent

current expansion: (2Q 09 thru revd 1Q19):      +12.16 percent          +9.64 percent

Manufacturing’s performance ticked up and the non-farm business sector’s performance ticked down, but the big picture didn’t change much. And now for the results incorporating the preliminary second quarter results:

                                                                        Non-farm business   Manufacturing

1990s expansion (2Q 1991-1Q 2001):              +23.74 percent       +45.86 percent

bubble expansion (4Q 2001-4Q 2007):             +16.59 percent       +30.23 percent

current expansion: (2Q 09 thru prelim 2Q19):  +12.80 percent         +9.19 percent

Because of the second quarter’s non-farm business growth and manufacturing’s decline, the gap between the two became even bigger – and manufacturing’s longer-term slowdown became even more dramatic. 

And as if this big picture wasn’t bad enough, let’s not forget that much of manufacturing’s recent recorded labor productivity gains have come from a methodological oddity that results in the offshoring of production strengthening the labor productivity results.  That’s the kind of productivity improvement that the domestic economy clearly doesn’t need.  And revealingly, for all the claims over the years that offshoring is a plus for that domestic economy, including for its workers, the evidence sure isn’t showing up in the manufacturing labor productivity data.   

An optimist could note that these preliminary second quarter results represented manufacturing’s worst readings since the first quarter of 2018, and that the second quarter results can still be revised upward. A pessimist could reply, especially regarding the latter, “They’d better be.”