(What’s Left of) Our Economy: More Evidence that Pay Really is Worsening U.S. Inflation

Tags

ECI, Employment Cost Index, Federal Reserve, inflation, Labor Department, labor productivity, multifactor productivity, productivity, recession, wages, workers, {What's Left of) Our Economy

Back in February, I wrote that although U.S. workers’ hourly wages were rising more slowly than the standard measure of consumer prices (the Consumer Price Index, or CPI), and therefore on that basis couldn’t be blamed for the recent, historically high inflation, there was one reason to be worried about the last few years’ healthy pay hikes: Such pay was rising faster than worker productivity.

I explained that this trend inevitably fueled inflation because “when businesses are in situations where wages are rising but their operations are becoming more efficient at a faster rate, they can maintain and even increase profits without passing higher costs on to their customers. When productivity is rising more slowly than inflation, this option isn’t available – or not nearly as readily.”

And more important than my views on the subject, these concerns have been expressed by Jerome Powell, Chairman of the Federal Reserve, the U.S. central bank that has the federal government’s main inflation-fighting responsibilities.

So it’s discouraging to report that new government data on both pay and productivity have come out in the last two weeks, and they make clear that the pay-productivity gap has just been widening faster than ever.

The pay data come from the Labor Department’s latest Employment Cost Index (ECI), which tracks not only hourly wages but salaries and benefits, while the productivity figures come from Labor’s new release on labor productivity, which measures how much output a single worker turns out in a single hour. And conveniently, both releases take the story through the first quarter of this year.

The results? From the fourth quarter of last year through this year’s first quarter, total compensation for all private sector workers, the ECI increased by 1.42 percent, while labor productivity for non-farm businesses (the category most closely followed, and basically identical with the private sector) fell by 1.93 percent. That last number was labor productivity’s worst such performance since the third quarter of 1947. (As RealityChek regulars know, I focus on private sector workers because their pay levels largely reflect market forces, not politicians’ decisions, and consequently reveal more about the labor picture’s fundamentals.)  

The year-on-year statistics aren’t much better – if at all. Between the first quarter of last year and the first quarter of this year, the ECI for the private sector grew by 4.75 percent, but labor productivity dipped by 0.62 percent.

And since the U.S. economy began recovering from the first wave of the CCP Virus pandemic, during the third quarter of 2020, the private sector ECI is up by 6.61 percent, while labor productivity is down by 0.78 percent.

As also known by RealityChek readers, labor productivity isn’t the economy’s only measure of efficiency. Multifactor productivity is a broader, and therefore presumably more useful gauge. It’s not as easy to work with because its results only come out annually, and the latest only take the story up to the end of last year.

The picture is decidedly more encouraging – at least recently. From 2020-2021, multifactor productivity for non-farm businesses improved by 3.17 percent. But it still wasn’t good relatively speaking, since from the fourth quarter of 2020 through the fourth quarter of 2021, the private sector ECI increased by 4.38 percent.

Worse, from 2001 (when the Labor Department began the ECI) to last year, pay b that gauge was up 74 percent while non-farm business multifactor productivity had advanced by a mere 16.46 percent.  Therefore, clearly the recent pay and productivity numbers don’t simply stem from pandemic-related distortions of the economy. 

To repeat important points from last February’s post, the productivity lag doesn’t mean that U.S. workers overall don’t deserve nice-sized raises and better benefits, and it certainly doesn’t mean that they’re solely or largely to blame even for poor labor productivity growth. After all, managers are paid as handsomely as they are fundamentally to figure out how to make their employees more productive. Also, productivity is a barometer of economic performance that’s unusually difficult to determine precisely.

But the new figures do strengthen the case that labor costs bear significant responsibility for boosting inflation, and that a major fear surrounding overheated price increases – that inflation acquires powerful momentum as surging prices lead to big wage hike demands and vice versa, and create a spiralling effect that’s excuciatingly difficult to end without the Fed throwing the economy into recession. Just as depressingly, the new pay and productivity figures also strengthen the case that, unless the economy becomes a lot more productive very quickly, the sooner this harsh medicine is administered, the better for everyone in the long run.

(What’s Left of) Our Economy: A U.S. Productivity Report with Something for Everyone

Tags

CCP Virus, coronavirus, COVID 19, labor productivity, productivity, stay at home economy, technology, total factor productivity, Wuhan virus, {What's Left of) Our Economy

As known by RealityChek readers, I’m always hesitant to make too much of official U.S. productivity statistics because many economists believe that these various measures of efficiency are unusually hard to measure. (Google “productivity,” “data,” “measurement,” and “problems” and you’ll see what I mean.)

Moreover, I’ve been especially hesitant during the CCP Virus era, because the pandemic and related lockdowns and behavioral changes have been so unprecedented, and it’s still far from clear how lasting the effects will be.

Having said that, these data surely aren’t completely meaningless either, and a major finding of theirs has been so dramatic that it’s tough to dismiss: Both the relatively narrow measure of labor productivity, or the broader measure of total factor productivity show a big slowdown in productivity growth in recent decades.

For total factor productivity, here are the figures that compare the performance of non-farm businesses in percentage terms during the last three economic recoveries (i.e., using the best apples-to-apples data) before the CCP Virus-era bounceback that began in the third quarter of 2020:

1990s expansion (1991-2000): +10.34 percent

bubble decade expansion (02-07): +6.91 percent

post-Great Recession expansion (10-19): +4.88 percent

The main evidence for the slowdown is the fact that even though the latest expansion was the same length as that of the 1990s, its cumulative total factor productivity growth was less than half as strong.

In this context, it’s noteworthy today’s Labor Department release on total factor productivity (which, unlike labor productivity, tries to show business’ success in using a wide range of inputs – not just workers – to improve efficiency) has something for both optimists and pessimists.

Glass-half-full types will observe that, in 2021, total factor productivity grew by 3.17 percent – a record in a statistical series going back to 1987. The previous fastest annual pace was 1992’s 2.88 percent.

The glass-half-empty types, though, can argue that even this big advance won’t be enough to end the long-running slowdown. In the first place, the excellent 2020-21 impovement followed a 1.97 percent 2019-20 decrease that was the worst performance of all time. And in that vein, because solid total factor productivity increases are typical of early stages of an economic recovery, the 2021 year-on-year jump may only be a post-CCP Virus reversion to a dreary long-term mean.

The optimists can counter by claiming that pandemic-driven trends like severe labor shortages, consequently rising wages, and the advent of a work-at-home era in both the public and private sectors will push employers to invest more in labor-saving and communications technology in particular. The result will be a turning point in the recent crummy U.S. productivity story.

The only certainty I can see is that the virus is becoming endemic and that its economic growth-depressing effects will fade steadily (at least until the next pandemic). Other than that, I’ll simply say that the force of inertia alone indicates to me that the burden of proof for a durable productivity upswing – and for a needed U.S. transition from prosperity based on government stimulus to well-being with sturdier foundations – still lies with the optimists.

(What’s Left of) Our Economy: One Reason Wages May Indeed be Fueling U.S. Inflation

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business, consumer price index, ECI, Employment Cost Index, Federal Reserve, inflation, Jerome Powell, labor productivity, management, multifactor productivity, productivity, wages, workers, {What's Left of) Our Economy

As known by RealityChek regulars, I’ve pushed back strongly (e.g., here) against claims that today’s historically lofty levels of U.S. inflation have been driven largely or even significantly by wage costs. My main point: However healthy, if the wage increases American workers have gained recently lag behind the overall increase in prices across the entire economy – which has been the case – then how can they deserve much blame?

Even so, one other consideration needs to be added to the mix. It was mentioned by Federal Reserve Chair Jerome Powell in his press conference following the central bank’s announcement of its monetary policy decisions during the December meeting of its Open Market Committee (the partly rotating group of Fed governors that determines short-term interest rates and, more recently, the pace of bond buying or selling).

As Powell stated, the Fed is watching “the risks that persistent real wage growth in excess of productivity [growth] could put upward pressure on inflation.” That’s because when businesses are in situations where wages are rising but their operations are becoming more efficient at a faster rate, they can maintain and even increase profits without passing higher costs on to their customers. When productivity is rising more slowly than inflation, this option isn’t available – or not nearly as readily.

Powell also said that “we don’t see that yet.” But in fact, if you compare one measure of employee pay that he’s been watching closely with the most current measure of productivity growth, that’s exactly what you’ll see – and been happening consistently for two decades.

The pay gauge in question is the Employment Cost Index (ECI) created by the Labor Department. What’s especially useful about it is that is takes into account not only wages and salaries, but the full range of benefits workers receive. This data series goes back to 2001, and if you (1) look at the total compensation figures for all private sector workers (as always, I leave out government workers because their pay is determined largely by politicians’ decisions, not market forces) in pre-inflation terms, then (2) place them side-by-side with the inflation results, and then (3), check these against the Labor Department’s labor productivity results, it’s clear that pay has been rising considerably faster than productivity.

For example, during largely high-inflation 2021, the employment cost index (which is measured quarterly) rose on an annual basis during all four quarters.Yet during the second, third, and fourth quarters of last year, labor productivity by the same yardstick improved more slowly than the ECI. In other words, worker pay was rising faster than productivity.

Nor are these results atypical. In fact, from the first quarter of 2001 through the fourth quarter of last year, the ECI is up 74.12 percent but labor productivity is up jus 47.62 percent.

Another way to look at the subject: Before the fourth quarter ECI and labor productivity results came out (on January 28 and February 3, respectively), I looked at the annual changes in both sets of data for the third quarters of each year going back to 2001. During those 21 third quarters, annual productivity growth lagged annual ECI growth in 15.

It’s important to note that these conclusions don’t automatically justify assuming that worker compensation increases are a major driver of today’s inflation after all, much less that productivity growth’s relatively slow advance is employees’ fault. After all, as just noted, labor productivity has been rising more sluggishly than the ECI for two decades. Inflation didn’t take off until last year. Moreover, the labor productivity number reflects far more than the amount of physical and/or mental effort workers put into their jobs. It’s also a function of how well business owners perform – e.g., in terms of giving their employees the equipment and training they need to do their jobs effectively, and of organizing their companies in ways that maximize performance.

In addition, labor productivity isn’t the only gauge of efficiency monitored by the Labor Department. Multifactor productivity (also known as total factor productivity) is tracked, too. This data series, as its name implies, tries to determine efficiency by examining all the inputs that go into corporate operations – including not just person hours worked, but capital, energy, materials, and all the services that are used to produce goods and, yes, other services.

I haven’t compared the trends in the ECI and multifactor productivity, though, for one big reason: Because it depends on collecting so much more information, the multifactor productivity results come out much more slowly than the labor productivity reports. And the 2021 figures don’t seem to be due out for several months.

Finally, as I’ve also noted (see, e.g., here), most economists believe that productivity is one of the most difficult features of the economic landscape to measure. So the wage and productivity comparisons should be viewed with some non-trivial amount of caution. 

Yet if worker compensation is indeed rising faster than productivity, that’s a story that’s unlikely to end well for the U.S. economy. Maybe those multifactor productivity figures – whenever the heck they’re released – will provide some much needed further clarity. 

 

(What’s Left of) Our Economy: A Big Productivity Data Surprise

Tags

1990s expansion, Barack Obama, Labor Department, labor productivity, manufacturing, multi-factor productivity, Trump, {What's Left of) Our Economy

In a world that keeps reminding us it’s full of surprises both good and bad, why should official U.S. economic data – even data that rarely make headlines – be any different? So I suppose that I should have expected that the big news in a recent release on the broadest measure of productivity (which I was planning to write on basically in order to start closing the books on the Trump administration’s pre-CCP Virus economic record), turns out to be completely different than I could have foreseen. It has to do with the significantly revised – and worse – picture it draws of the U.S. economy’s performance in the 1990s, and specifically in manufacturing.

The new statistics from the Labor Department cover multi-factor productivity – which as the name implies, tries to measure efficiency according to how much in the way of all different kinds of inputs (like labor, capital, materials, and energy) are needed to generate a unit of output.

These figures attract less attention that the statistics that track the role of labor alone, because they come out much less often than the quarterly labor productivity numbers. But even given how much uncertainty surrounds the entire idea of gauging productivity, their breadth arguably makes them more important. And of course both measures of efficiency matter greatly because it’s been tough for anyone to figure out how a country achieves and maintains true economic health and sustainably rising living standards without strong productivity growth.

As known by RealityChek regulars, the best way to measure any economic trend or development entails comparing performance during similar phases of the economic or business cycle – that is, expansions or contractions. And before the latest manufacturing multi-factor productivity data came out (last Thursday), bringing the story through year-end 2019, here’s how the numbers for the last three expansions stacked up through 2018:

1990s expansion (1991-2000): +23.40%

bubble decade expansion (02-07): +11.74%

last expansion (10-18): -4.84%

So clearly, there’s not only been a big slowdown over time in manufacturing’s multi-factor productivity growth. During the expansion that was still underway through 2018, Americans had actually experienced multi-factor productivity decline.

Last Thursday’s report contained revisions, and although the slowdown story remained intact, look at the results for that 1990s expansion:

1990s expansion (1991-2000): +15.77 percent

bubble decade expansion (02-07): +11.72 percent

last expansion (10-18): -2.55 percent

Manufacturing’s multi-factor productivity growth turns out to have been about a third lower than previously thought. That’s huge! And the better figure for the latest expansion through 2018 doesn’t come close to compensating – especially since last year’s 1.6 percent annual drop dragged the expansion total decrease down to 4.14 percent.

But the revisions also shed new light on the Trump record per se, and in particular on its performance in multi-factor productivity terms versus that of the final three years of the Obama administration. And the Trump record comes out ahead.

Here’s what we knew along these lines before last Thursday’s report came out: The last two Obama years saw a total 3.18 percent drop in manufacturing multi-factor productivity, compared with a fractional 0.07 dip during the first two Trump years.

The new Labor Department revisions improve the Obama performance to a 3.03 percent decrease, but upgraded the Trump performance to a 1.56 percent increase.

And since these numbers now go through the end of 2019, they show that manufacturing multi-factor productivity over the last three Obama years sank by 1.95 percent, and over the first three Trump years declined by 0.11 percent (due to that lousy 2019).

Because as indicated above, measuring productivity growth is such an inexact science, and because the federal government’s career economists generally are so diligent, next year’s multi-factor productivity report could well contain still more surprising revisions. But as for that new dimmer view of the 1990s expansion, so often lauded as an economic near-Golden Age – I suspect it’s here for the duration.

Im-Politic: On the Economy, Obama’s Record Looks Stronger than Trump’s

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Barack Obama, CCP Virus, coronavirus, COVID 19, election 2020, Employment to Population Ratio, GDP, gross domestic product, Im-Politic, Jobs, Joe Biden, Labor Force Participation Rate, labor productivity, manufacturing, non-farm jobs, private sector, productivity, real GDP, real private sector, real wages, recession, subsidized private sector, Trump, value added, wages, Wuhan virus

Not surprisingly, as this U.S. presidential cycle gets ever more intense, so has the debate over which boasts a better record in helping steer the nation’s economy: the Obama administration in which Democratic presidential nominee Joe Biden served as second-in-command, or the incumbent Trump administration. I’ve just looked over some key data, and the verdict on most counts goes to the Obama administration. The margin of victory here isn’t huge, but it’s anything but razor thin, either. Moreover, any Obama edge is surprising given that the economy is President Trump’s major advantage in nearly all the polls.

All the same, here are the data. They compare performance during the last three full years of the Obama presidency and the first three full years of the Trump presidency. In my view, these time-frames deserve priority because they’re the ones closest to each other in the same expansionary business cycle, making apples to apples results much likelier.

The time-frames of course leave out the CCP Virus period, during which all the Trump numbers sank like stones. But if you regard the virus’ economic effects as purely artificial, having nothing to do with the economy’s fundamentals (as I do), then you want to strip them out.

Other methodological notes: Although the jobs-focused data come out from the federal government on a monthly basis, and therefore permit comparisons between completely identical (and virus-adjusted) three-year periods, the economic growth and productivity data don’t, so I show Trump results both through the first quarter of this year (affected by the shutdowns that began in March) and through the last quarter of 2019. In addition, regarding the monthly figures, because of the January 20 inauguration date, I peg the end of the Obama administration as January, 2017 and the beginning of the Trump administration as February, 2017.

And off we go, starting with overall employment, which consists of the Bureau of Labor Department’s U.S. employment universe – “non-farm jobs.”

Obama: +5.55 percent            Trump: +4.56 percent

But of course, non-farm jobs include all government jobs, and their status has much less to do with the economy’s underlying strengths and weaknesses than with politicians’ decision. So here are the numbers for private sector jobs.

Obama: +6.56 percent            Trump: +5.04 percent

So advantage Obama again. As RealityChek regulars know, however, not all private sector jobs are created equal. In fact, many barely deserve the term at all, because their circumstances depend so heavily on government spending. Healthcare is of course the leading example. Therefore, it’s useful to examine the employment results in what I’ve called the “real private sector”.

Obama +6.22 percent             Trump: + 4.63 percent

It’s another Obama out-performance. This string is broken when it comes to manufacturing jobs, however.

Obama: +2.38 percent           Trump: +3.78 percent

But Obama comes out ahead on inflation-adjusted wages for the entire private sector.

Obama +3.69 percent           Trump: +2.99 percent

And the margin is even bigger for real manufacturing wages.

Obama: +3.15 percent          Trump: +0.74 percent

One problem with looking at jobs gains or losses, or even the unemployment rate, is that these numbers don’t tell the whole story about the health of the labor market. To fill in the gaps, economists like to examine two performance measures called the Labor Force Participation Rate, and the Employment to Population Ratio.

The former, according to well regarded left-of-center economics think tank, reveals “the number of people in the labor force—defined as the sum of employed and unemployed persons—as a share of the total working-age population, which is the number of civilian, non-institutionalized people, age 16 and over.”

The latter, the same source explains, shows “the number of people currently employed as a share of the total working-age population, which is the number of civilian, non-institutionalized persons, age 16 and over.”

For what it’s worth, this reliable economics and finance website claims that the Employment to Population Ratio provides the best indication of job shrinkage or growth. So let’s begin there.

Obama: 58.8 percent to 59.9 percent       Trump: 59.9 percent to 61.1 percent

Pretty much a standoff.

As for Labor Force Participation:

Obama: 62.9 percent to 62.6 percent       Trump: 62.8 percent to 63.4 percent

Advantage, Mr. Trump.

As previously mentioned, the economic growth figures are only reported quarterly. Keeping that in mind, here’s how the two administrations stack up. The most commonly followed measure of the economy’s size and how it changes is inflation-adjusted gross domestic product (GDP).

Obama: +8.19 percent           Trump: +5.75 percent

These data, though, include shutdown-y March, 2020. Taking the story only through the end of 2019 brings the Trump years’ performance up to 7.11 percent – but he still trails.

Interestingly, even including the first quarter of this CCP Virus-y year, Mr. Trump’s record is slightly better when another metric for economic growth is used – value-added. Its value lies in trying to eliminate the double- and even more overcounting that results when the of the parts and other inputs of a complicated product are counted both when they’re turned out individually, and when they’re contained in that final product.

Obama: +12.09 percent          Trump: +12.24 percent

The Trump presidency’s margin is even bigger in manufacturing value-added, and even including the first quarter:

Obama: +7.09 percent            Trump: +10.58 percent

Importantly, all the above value-added numbers are pre-inflation. After-inflation value-added data are tracked by the federal government, too, but they’re not even measured on a quarterly basis. Only full-year numbers are available. So since these make precise comparisons less possible, I’m skipping them.

Finally, here are numbers that hardly ever make the news, but might be the most important of all – the productivity data. These various measures of efficiency are widely viewed by economists are crucial to determining how healthy and durable economic growth is and will be, and therefore how strongly and for how long living standards can rise.

Results aren’t up-to-date enough for the broadest measure of economic efficiency – multi-factor productivity. But they are for the narrower measure, labor productivity – which gauges how much a single worker can produce in a single hour on the job – starting with the overall economy

Obama: +3.97 percent           Trump: +3.95 percent

And if you want to remove the first quarter of this year, because of the virus effect in March, overall labor productivity during the Trump period was up 4.02 percent

Labor productivity is monitored for manufacturing, too, and here are those statistics including the first quarter of this year:

Obama: -2.57 percent           Trump: +0.29 percent .

Oddly, if the first quarter is removed, the Trump years’ performance worsens a bit – and even falls to an overall dip of 0.09 percent. But however poor, it still tops the record of the Obama years.

So why are the Trump economy poll numbers so good? One possible answer: The final year of the Obama presidency was feeble by nearly all measures. Real gross domestic product advanced by only 1.70 percent. Total employment grew by a mere 1.64 percent, versuss 2.19 percent in 2014. National manufacturing employment actually dipped by 6,000 from 2015 levels. Real wage growth overall slowed from 1.26 percent in 2014 to 0.56 percent in 2016. And inflation-adjusted manufacturing wages performed scarcely better.

Moreover, as the New York Times article linked above makes clear, the public’s evaluations of the Trump economic record are incredibly partisan – often conflicting with a respondent’s actual situation.

It’s also possible and legitimate, as I’ve noted, to point to some important reasons for this Trump under-performance.  The President’s trade policies clearly disrupted national and global supply chains, and the consequent inefficiencies surely dragged on GDP and employment in the short term.  Boeing aircraft’s safety woes have undercut national economic performance lately, too.  But good luck to you if you think these considerations are going to have any effect on voters.  

I’m hardly naive enough to think that these or other economic facts will be enough to determine November’s outcome. And I have no idea how voters will factor in the deep CCP Virus-induced recession into their thinking. But the facts aren’t a throwaway, either, and although the Obama record didn’t exactly thump Mr. Trump’s, it’ll certainly provide Biden with considerable ammunition.

(What’s Left of) Our Economy: U.S. Productivity Growth Keeps Lagging Historically, but has Bumped Under Trump

Tags

Barack Obama, election 2020, labor productivity, manufacturing, multifactor productivity, non-farm business, productivity, Trump, {What's Left of) Our Economy

Sure, they’re lagging indicators, and don’t tell us much, if anything, about whatever coronavirus effect the American economy might face. Still, today’s new U.S. government data on labor productivity both say something about where the economy has been until recently before pandemic fears hit, and provide a noteworthy point of comparison between the record of President Trump and his White House predecessor, Barack Obama. And although the news for the economy isn’t good at all (especially for manufacturing), the findings should cheer Mr. Trump and his supporters.

The figures, from the Department of Labor’s Bureau of Labor Statistics (BLS), cover labor productivity – a gauge of output of a good or service per each hour a worker has been on the job trying to create it. It’s the narrower of the two productivity measures calculated by BLS (the other, multifactor productivity, reports on output as a function of many more inputs, like capital and technology), but it’s released on a timelier basis. And the latest numbers not only bring the story up to the fourth quarter of last year (preliminarily). They also incorporate revisions – some of which go back to 1947!

As a result, it’s now possible to take a new look at the nation’s productivity performance during the last three economic recoveries – the most economically valid, apples-to-apples way of comparing trends over significant time spans.

And here’s where the news isn’t good, as will be made clear from the following two tables. The first shows the cumulative productivity changes during those last three expansions before these latest revisions:

                                                                        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 final 3Q 19):     +12.74 percent        +9.42 percent

The second shows the same developments with the revisions.

                                                                         Non-farm business    Manufacturing

1990s expansion (2Q 1991-1Q 2001):              +23.75 percent        +44.68 percent

bubble expansion (4Q 2001-4Q 2007):             +16.58 percent        +30.92 percent

current expansion (2Q 09 thru final 3Q 19):     +12.74 percent          +6.32 percent

current expansion (2Q 09 thru prelim 4Q 19):  +13.44 percent          +6.11 percent

The big takeaway is that although the revisions leave the picture for both non-farm businesses (BLS’ main definition of the American economic universe) and manufacturing unchanged in terms of a long and substantial productivity slowdown, they downgrade manufacturing’s performance during the current recovery substantially. In fact, industry’s labor productivity growth is now reported to be about a third slower than previously thought.

Since it’s a presidential campaign year, I thought a Trump-Obama comparison would be appropriate, and here’s where the good news for Trump World, at the very least, comes in.

                                                                   Non-farm business          Manufacturing

last 12 Obama quarters                                 +3.31 percent                -2.27 percent

first 12 Trump quarters                                 +4.17 percent                -0.05 percent

The time frames used make sense because they represent identical numbers of quarters for each President that are also the closest to each other in the current (expansionary) business/economic cycle. The productivity performance under Mr. Trump hasn’t been gangbusters historically speaking for either sector of the economy. But it’s clearly been better than that registered during the most comparable Obama period.

Since most serious students of the economy agree that there’s lots of room for improvement in measuring productivity growth (especially for the services sectors), it would be quite the stretch for Mr. Trump to claim credit for these favorable numbers. Yet when have such substantive considerations ever stopped politicians from pretending they wield such power – for economic good or ill? So unless the productivity arrows start moving down markedly, Americans might finally hear something from the President about productivity before too long.

(What’s Left of) Our Economy: The State of the Union’s Productivity is Still Gloomy

Tags

Labor Department, labor productivity, manufacturing, productivity, State of the Union, Trump, {What's Left of) Our Economy

Hooray! Americans and the world just got a new batch of productivity data. You know – those statistics that everyone knowing anything about economics calls a key to sustainable national prosperity, but that are usually ignored when they’re issued even when impeachments and State of the Union speeches and presidential primaries aren’t dominating the headlines.

But as often been the case recently, the news on the whole discouraging. Non-farm businesses (the national economic universe as defined by the Labor Department, which tracks productivity) registered a better performance according to these preliminary figures for the fourth quarter of last year than for the third quarter. Yet the rate of year-on-year improvement slowed. Manufacturing’s figures, moreover, worsened over both time frames.

No better is the big picture revealed by these results: The U.S. economy remains smack in the middle of a major productivity slowdown, which augurs poorly for its ability to keep growing in a healthy (as opposed to a bubble-ized) way.

This productivity report measures labor productivity – the amount of output any sector of the economy or the entire economy can generate for each hour worked by each of its employees. It’s a narrower gauge of business efficiency than multi-factor productivity – which, as suggested by its name, records production as a function of a wide variety of inputs. But the labor number is reported on a timelier basis, and therefore tends to attract the most attention – when it attracts any attention at all!

According to the new release, labor productivity during the last three months of 2019 advanced by 1.40 percent at an annual rate. The final third quarter figure (which went un-revised)? A 0.20 percent annualized drop.

Moreover, on an annual basis, non-farm business labor productivity rose between 2018 and 2019 by 1.79 percent. That’s considerably faster than the 1.01 percent advance during the previous year.

Unfortunately, that’s where the good news stops. Labor productivity in domestic manufacturing – once the economy’s leader on this score (see the table below) – dropped sequentially for the third straight quarter. And this 1.20 percent annualized decrease was worse than the third quarter’s 0.26 percent annualized decline – which itself was revised down from a 0.10 percent increase.

Even worse is the latest year-on-year comparison. Between 2017 and 2018, manufacturing’s labor productivity rose by 0.60 percent – not terrific, but at least an improvement. Last year, it tumbled by 0.68 percent. That’s its worst such performance since 2014-2015’s 1.45 percent dive.

But if you really want to be bummed, check out the trends over the last three economic recoveries (including the current expansion, whose length, at least, keeps setting records). The ever weaker growth rates are troubling enough. Worse still is the slowdown’s acceleration (even in non-farm businesses if you take into account the length of the ongoing recovery.

                                                                         Non-farm business   Manufacturing

1990s expansion (2Q 91-1Q 01):                       +23.74 percent      +45.86 percent

bubble expansion (4Q 01-4Q 07):                      +16.59 percent     +30.23 percent

current expansion (2Q 09 thru prelim 4Q 19):   +13.19 percent      +5.98 percent

President Trump’s State of the Union address Tuesday night boasted about numerous economic achievement during his administration, and as noted in my analysis of yesterday’s U.S. trade figures, on some scores, he’s entitled to do so. But the speech never mentioned productivity, and given today’s new numbers, it’s easy to understand why.

(What’s Left of) Our Economy: New Productivity Data Further Debunk “Tariffs Hurt” Claims

Tags

aluminum, aluminum tariffs, China, durable goods, fabricated metals products, inputs, Labor Department, labor productivity, manufacturing, metals, metals tariffs, multi-factor productivity, productivity, steel, steel tariffs, tariffs, Trade, trade law, World Trade Organization, WTO, {What's Left of) Our Economy

The Trump administration’s announcement last Friday of new tariffs on some metals-using manufactures imports was greeted with the predictable combination of chuckles and gloating from the economists, think tank hacks, and Mainstream Media journalists who keep insisting that all such trade curbs are self-destructive whenever they’re imposed.

If the critics bothered to look at the new official data on multi-factor productivity, however, they’d stop their victory laps in their tracks. For the Labor Department’s latest report on this broadest productivity measure utterly trashes their claims that the tariffs slapped on metals in early 2018 – which unofficially launched the so-called Trump trade wars – have backfired by undercutting most domestic American manufacturing.

In fairness, the Trump administration itself gave the trade and globalization cheerleaders lots of evidence for their triumphalism. Specifically, the levies were justified with statistics showing that various categories of goods made primarily of tariff-ed steel and aluminum had seen major surges of imports since the duties began. The obvious conclusion? Foreign-based producers of these products were capitalizing on their cheaper metals available to their factories to undersell their U.S.-based competition.

As a result, Mr. Trump decided to tariff some of these final products, too – to erase the advantage created for imports from less expensive steel and aluminum.

So in one sense, it’s tough to blame tariff critics for feeling vindicated about predictions that the metals levies might boost the metals-producing sectors themselves, but injure the far larger metals-using sectors. Ditto for their warnings that in an economy with so many connected industries, protection for one or a few would inevitably spur calls for such alleged favoritism by others, threatening a consequent loss of efficiency for all of manufacturing and even the entire economy.

Examine the issue in more detail, though, and you see that it’s entirely possible to arrive at radically different conclusions. For example, the new tariffs appear to be imposed on a limited set of products, and none of them (e.g., nails, tacks, wires, cables, even aluminum auto stampings) qualifies as a major industry. In other words, the chief metals-using industries, like motor vehicles and parts overall, aerospace, industrial machinery (many of which have been complaining loudly about the metals tariffs, even though their overall operational costs have been barely affected) were left out.

Finally in this vein, and as the critics imply, the new Trump tariffs also make the case for trade curbs on any final products whose significant inputs receive duties. Why indeed strap otherwise competitive domestic producers with higher prices for materials, parts, and components? This practice has been a major flaw in the U.S. trade law system, which has prioritized legal over economic and industrial considerations, since its founding. And in fact, my old organization, the U.S. Business and Industry Council, has been urging this reform since at least 2008.

Even better – to prevent cronyism from influencing such trade policy decisions, impose a uniform global tariff on all manufactures, or all non-energy goods.

But it’s just as important to point out a gaping hole in the longstanding argument that cheap imported inputs (including subsidized, and therefore artificially cheap imported inputs) are essential for the overall global competitiveness of U.S. domestic manufacturing. And the hole has been opened (or perhaps it’s more accurate to say, reopened, given this previous RealityChek analysis of earlier data) by those new multi-factor productivity statistics.

They only go through 2018 (such time lags explain why multi-factor productivity trends aren’t followed as closely as labor productivity trends). But they’re the broader of the two productivity measures, as they gauge the effect of many inputs other than hours worked. And via the table below, they make clear that even the wide open access domestic manufacturers enjoyed to artificially cheap metals and other imported inputs have played absolutely no evident role in improving industry’s health. In fact, there’s reason to conclude that the more access domestic industry had to such materials, parts, and components, the less productive it became.

                                                               Total mfg   Durable goods   fabr metals

1990s expansion (91-2000):                   +23.40%       +38.76%         +4.79%

bubble decade expansion (02-07):          +11.74%      +16.61%          +7.62%

current expansion (10-present):                -4.84%         -0.84%           -4.51%

pre-China WTO (87-2001):                   +22.18%      +37.72%           -3.32%

post-China WTO (02-present):               +6.72%      +17.17%           -2.05%

As usual, the time periods chosen to illustrate these trends consist (with one exception) of recent economic expansions (because they enable the best apples-to-apples comparisons to be made). And the 1990s expansion is the first one examined because the relevant Labor Department data only go back to 1987. The products chosen consist of all manufactured goods, durable goods industries (the super-category containing most of the big metals users), and fabricated metals products (the most metals-intensive sectors of all).

The table demonstrates that multi-factor productivity growth across-the-board has weakened dramatically from the 1990s expansion through the current – ongoing – expansion. The slowdown between the 1990s expansion and the previous decade’s expansion was moderate (and multi-factor productivity actually grew faster during the second in fabricated metals, though in absolute terms its improvement lagged badly). But during the current recovery, multi-factor productivity growth has been replaced in all three instances by multi-factor productivity decline. And crucially, during none of this time did any of these manufacturing categories face any shortage of imported inputs of any kind – subsidized or not.

Indeed, one event in 2001 greatly increased the supply of subsidized inputs – China’s admission into the World Trade Organization (WTO). For once China joined, the difficulty of using U.S. trade law to keep these Chinese products out of the U.S. economy became much greater.

Yet at the same time, as shown below, productivity growth was considerably weaker after China’s WTO entry than before in manufacturing overall, and in durable goods. And although its performance actually improved in fabricated metals, that industry’s performance was much worse in absolute terms.

Nor does the inclusion of the 2007-2009 Great Recession in the post-2002 China-related data (which violates the “apples-to-apples rule”) seem to have been a game changer – because the worst performances of all in each case, and by a mile, have been registered during the current expansion. Moreover, since the data stop in 2018, those current expansion results are dominated by the period preceding both the Trump metals tariffs and the Trump China tariffs (most of which target industrial inputs, as opposed to final products).

It’s entirely possible that, for various reasons, the multi-factor productivity statistics would have been even worse if not for the widespread availability of cheap imports. Or maybe multi-factor productivity isn’t much of a measure of manufacturing’s health? Both alternative explanations, however, seem pretty far-fetched (especially given the pre- and post-China WTO results).

Much likelier – as I argued in that post linked above – the availability of cheap inputs has helped retard productivity growth by enabling businesses to achieve cost-savings without investing in research and development into new products and especially processes, and without buying more efficient equipment (including software).

(What’s Left of) Our Economy: So You Think Trade is an Engine of Productivity Growth?

Tags

economics, economists, European Central Bank, exports, free trade, GDP, gross domestic product, imports, International Monetary Fund, labor productivity, productivity, productivity growth, total factor productivity, Trade, trade openness, World Bank, {What's Left of) Our Economy

The idea that the more international trade a country engages in, the more strongly its productivity will grow, is widely accepted among economists. Indeed, no less than the World Bank, the International Monetary Fund, and the European Central Bank (the eurozone’s version of America’s Federal Reserve) say so.

How then, can these august institutions and other believers explain the following: On the one hand according to the United Kingdom’s Royal Statistical Society, the country’s feeble annual average labor productivity growth of 0.3 percent over the last ten years was its “statistic of the decade”? Worse, it was the poorest decade for British productivity growth since the early 19^th century.

Yet on the other hand, during this period, the United Kingdom’s openness to foreign trade – a data point created by adding a country’s imports and exports and then expressing this sum as a percentage of its entire economy, or gross domestic product (GDP) – has for the most part been hovering near post-1960s highs. In other words, the more foreign trade the UK has been engaging in, the lower its productivity growth seems to have become.

Nor is this phenomenon restricted to the UK. The same pattern can be seen in the United States, although the country’s openness to trade is much lower than the United Kingdom’s in absolute terms (not surprising, since we’re comparing an island with a continental sized economy). RealityChek regulars shouldn’t have to be reminded about America’s discouraging collapse in labor productivity growth.

What about trade? In fairness, America’s openness to trade has been falling recently. But no, that’s not President Trump’s “fault.” The decline began in 2011, when trade’s share of GDP hit a post-1960 high of 30.79 percent. As of 2017 (the latest data year available according to this source), it still stood at 27.09 percent – much higher than the period average of 19.29 percent.   

Also in fairness: Simply because openness to trade for these two big national economies has coincided with lousy productivity growth doesn’t mean that openness to trade causes the problem (or vice versa). It doesn’t even mean that openness to trade is the main productivity culprit, for many different characteristics of an economy influence any single characteristic.

But certainly in light of the American and British experiences, even if the conventional wisdom is right and trade openness does encourage productivity growth, it’s clearly a policy choice that’s often overwhelmed by other features of that same economy. P.S. – it ain’t just the Anglo-Americans. The World Bank’s databases also portray global trade at only slightly off its all-time high as a share of the global economy. And guess what? It turns out that global productivity growth has been crappy lately, too, whether we’re talking labor productivity or total factor productivity (a broader gauge that measures output from the use of many different inputs, not just labor).

As a matter of fact, it’s not difficult to think of ways in which more trade can undermine productivity growth – e.g., if import floods decimate the sectors of the economy that have historically been its manufacturing leaders, or if trade policy fosters their offshoring. (Strong cases can be made for both propositions when it comes to American domestic manufacturing.) 

So the case that trade fosters productivity growth is hardly a slam dunk.  And that’s one more reason to believe that the broader case for free trade isn’t, either.

(What’s Left of) Our Economy: Back into Decline for U.S. Labor Productivity

Tags

durable goods manufacturing, labor productivity, manufacturing, multifactor productivity, nondurable goods, nonfarm business, productivity, total factor productivity, {What's Left of) Our Economy

Well, that didn’t last long. After two straight quarters of encouraging growth, U.S. labor productivity is back in the doldrums, with this morning’s preliminary data from the Labor Department revealing a drop during the third quarter of this year.

At least, however, these latest figures on the narrowest measure of the economy’s efficiency, and ability to grow healthily and generate sustainably rising living standards contained a novel recent twist: U.S.-based manufacturing outperformed the Labor Department’s main definition of the broader economy – the “nonfarm business sector.”

Moreover, the results pointed to a trend I hadn’t recognized till now: Manufacturing’s transformation from a national productivity leader into a laggard, which began during the current economy-wide recovery (and probably began during the Great Recession preceding it) is heavily concentrated in nondurable goods manufacturing. Labor productivity in the larger durable goods super-sector is still growing faster than that of nonfarm businesses, though the gap between the two has shrunk decidedly.

As known by RealityChek regulars, labor productivity measures how much output an American worker turns out for each hour he or she is on the job. It’s not as broad a gauge as “total factor productivity” (AKA “multifactor productivity), which measures output per hour resulting from a wide array of inputs, including not only human beings but capital, energy, materials, and others. But the labor productivity numbers come out on a timelier basis.

The news for the second quarter’s final (for now) data was pretty good. The increase in nonfarm business labor productivity was upgraded from a 2.3 percent annualized rate to 2.5 percent. Manufacturing’s 2.2 percent annualized drop, however, was revised down to a 2.4 percent decrease – its worse such performance since the four percent plunge in the third quarter of 2017.

This morning’s first initial read on third quarter labor productivity reversed this pattern. Nonfarm business labor productivity was down 0.3 percent on an annualized basis – worse than the 0.1 percent dip for manufacturing, and its first shrinkage since the fourth quarter of 2015 (when it fell by 3.5 percent annualized).

But it was the more detailed figures on manufacturing’s third quarter that really caught my eye. Durable goods sectors’ labor productivity performance was in the black, growing at a 1.2 percent annual pace. But the nondurables result was deep in the red – down 1.5 percent.

Nor are these results aberrations, as the table below shows. It presents the total labor productivity growth rates during the previous two economic recoveries and the current upturn (to ensure the best, apples-to-apples findings). The main takeaway: Both super-sectors have suffered major labor productivity growth rates declines since the 1990s expansion. But during the current recovery (the longest on record in the United States), labor productivity growth in nondurables plummeted much faster than in durables (which wasn’t killing it on this front, either).

                                                                                  Durable mfg    Nondurable mfg

1990s expansion (2Q 1991-1Q 2001):                   +66.11 percent  +23.81 percent

bubble expansion (4Q 2001-4Q 2007):                 +34.59 percent  +24.01 percent

current expansion (2Q 2009 thru final 2Q 19):     +15.37 percent    +5.83 percent

current expansion (2Q 2009 thru prelim 3Q 19):  +15.71 percent    +5.44 percent

Moreover, as made clear from the table below, and its comparison of labor productivity growth in nonfarm businesses and in manufacturing as a whole during the same periods, however poor the durables’ performance, it’s still better than that of nonfarm businesses in an absolute sense. Nonetheless, its lead is down considerably.

                                                                         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 final 2Q 19):     +12.85 percent         +9.00 percent

current expansion (2Q 09 thru prelim 3Q 19):  +12.77 percent         +8.97 percent

Today’s productivity read was the first of three to be released for the third quarter (additional revisions will be made down the road), so it’s possible that the overall labor productivity result will wind up being an upturn rather than a downturn.  But for now, any talk of a new U.S. productivity growth revival looks premature.