(What’s Left of) Our Economy: Productivity Growth Improves – A Bit

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Labor Department, labor productivity, manufacturing, multifactor productivity, non-farm business, productivity, recovery, total factor productivity, {What's Left of) Our Economy

Some more hard U.S. economic data came in this morning, and it looked pretty good. Even better, the news concerned productivity growth, which is widely viewed as the key to ensuring that the nation’s living standards can rise acceptably on a sustainable – as opposed to a bubble-ized – basis.

According to the Labor Department, America’s labor productivity in the second quarter of this year rose somewhat faster than was initially reported. Unfortunately, though, the economy still has a long way to go before it returns to the productivity growth rates it’s generated historically.

As RealityChek regulars know, labor productivity is the narrowest of the two gauges used by the U.S. government to measure this key indicator; it tells us how much output each American worker generates per hour on the job. Multifactor productivity (also called total factor productivity) shows output as a product of many more inputs (such as capital and energy and materials), but these numbers are more difficult to calculate, and come out with a greater time lag.

And although most intellectually honest economists admit that measuring productivity is one of their most challenging tasks, even these statistics are probably more reliable than “soft data” – the various private sector surveys that purport to measure business and consumer sentiment.

Today’s report judges that labor productivity for the non-farm business sector (the Labor Department’s main proxy for the entire economy) grew sequentially in the second quarter at an annualized rate of 1.53 percent. That’s better than the 0.99 percent first estimated and the strongest result since the 2.46 percent achieved in the third quarter of last year.

Second quarter labor productivity growth for manufacturing was upgraded, too – from 2.44 percent annualized quarter-to-quarter to 2.82 percent. And those are the best quarterly manufacturing results since the 3.20 percent spurt in the first quarter of 2012.

The Labor Department left unrevised the first quarter’s miserable 0.13 percent annualized non-farm business sequential productivity growth, and slightly downgraded manufacturing’s comparably poor first quarter improvement to 0.19 percent annualized. But the second quarter numbers are genuinely encouraging.

Still, do they signal the strong productivity revival the U.S. economy urgently needs? My crystal ball is no clearer than anyone else’s. All I can do is point out what a heavy lift this would be. Here are the non-farm business productivity growth performances for the last three economic recoveries (including the current expansion). As always, the best apples-to-apples data comes from measuring economic performance during similar phases of the business and economic cycle:

2Q 1991 to 1Q 2001: +23.25 percent

4Q 2001 to 4Q 2007: +16.03 percent

2Q 2009 to present: +8.65 percent

And here are the same figures for manufacturing:

2Q 1991 to 1Q 2001: +46.81 percent

4Q 2001 to 4Q 2007: +41.23 percent

2Q 2009 to present: +22.33 percent

So even with the latest improvements, labor productivity is advancing during this recovery at only roughly half the rate of its most recent predecessors. And the current expansion has been considerably longer than the previous recovery, and nearly as long as the 1990s recovery.

I’m not saying that no one should be optimistic about the United States significantly closing this gap going forward. But it’s still big enough that, so far, this expectation does seem to be a leap of faith.

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(What’s Left of) Our Economy: Still Desperately Seeking Decent Productivity Growth

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Labor Department, labor productivity, manufacturing, multi-factor productivity, non-farm business, productivity, recovery, {What's Left of) Our Economy

The good news about America’s productivity growth that came out this morning is that new Labor Department figures showed it’s gotten a little bit better lately. The bad news is that it needs to get a lot better if the nation is going to achieve the economic goals everyone says they want: economic growth that’s healthy, and wages rising satisfactorily.

Today’s data, which report the results on a relatively narrow but timely measure of productivity growth, also furnish a handy opportunity to review recently released productivity measures that are broader but not quite so up to date.

According to the Labor Department’s preliminary read, U.S. labor productivity for non-farm businesses (the standard definition of the American economic universe) rose in the second quarter of this year at a 0.99 percent annual rate. The first quarter’s advance (feel free to make the “air quotes” gesture) was revised up from literally nothing to next-to-nothing. As RealityChek regulars know, labor productivity measures how much output is generated by each hour worked by each worker.

And that’s where the good news stops. The new Labor Department release also revised these labor productivity figures going back to 2014. These updates left the dismal recent productivity picture little changed, with one noteworthy exception: On an annual basis, labor productivity last year is now judged to have fallen (by 0.1 percent) for the first time since 1982.

Just how gloomy the labor productivity picture has gotten becomes clear when comparing its performance during the last few U.S. economic expansions (a methodology that gives us the best apples-to-apples growth). Note: Because of the new revisions, these figures supersede those contained in RealityChek’s past posts on labor productivity.

2Q 1991 to 1Q 2001: +23.25 percent

4Q 2001 to 4Q 2007: +16.03 percent

2Q 2009 to present: +8.49 percent

Manufacturing’s labor productivity performance shows this kind of deterioration, too. It’s second quarter rise was judged preliminarily to have been 2.44 percent annualized – much better (as has usually been the case) than the increase for the rest of the economy. But the first quarter figure was revised down to 0.29 percent.

And here are the figures for the current economic recovery and its two predecessors:

2Q 1991 to 1Q 2001: +46.81 percent

4Q 2001 to 4Q 2007: +41.23 percent

2Q 2009 to present: +22.25 percent

So manufacturing has seen a big labor productivity slowdown during this expansion, but it’s still leading the economy in this form of productivity growth by far.

But there’s one fly in the ointment here. As previously reported, the way the Labor Department measures labor productivity throughout the economy results in the offshoring of work generating better productivity. And of course nothing’s been offshored in recent decades like manufacturing work. Since offshoring-produced productivity gains aren’t the kind any thinking person would want, this means that the improvements seen in industry lately aren’t quite so impressive as they look. In fact, according to the Department between 1997 and 2006, offshoring accounted for 23 percent of the sector’s labor productivity gains.

At the same time, labor productivity isn’t the only kind of productivity. Multi-factor productivity is a broader, and more reliable measure; it tells us how much output is generated from the use of a wide variety of inputs, like technology, materials, capital, and energy as well as labor. The problem is that the multi-factor productivity data don’t come out nearly as often, and the latest take us only through 2015.

Still, that’s what we have, and what’s striking is that they reveal that, at least for “now,” manufacturing has lost its productivity growth lead. Here are the annual changes reported by the Labor Department for manufacturing in a July 12 release, combined with the latest such figures for the non-farm business sector as a whole:

non-farm business +0.61 percent

manufacturing -2.80 percent

Nor are the longer-term results any better for industry during the last three expansions:

                                        1991-2001          2001-2007           2009-2015

non-farm business       +11.51 percent     +9.91 percent      +5.52 percent

manufacturing             +13.98 percent   +14.66 percent       -2.17 percent

Although honest economists will admit that productivity is one of the most mysterious subjects they study, they’ll also insist that the official statistics provide a reasonably accurate picture about how the nation is using this crucial “secret sauce” for sustainable prosperity. These new Labor Department reports once again remind that the U.S. economy urgently needs to get its productivity culinary skills back up to snuff.

(What’s Left of) Our Economy: So Productivity is the Main Manufacturing Jobs Killer?

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Employment, Jobs, labor productivity, manufacturing, non-farm business, non-farm employment, productivity, Trade, Trump, {What's Left of) Our Economy

If you’ve been following the increasingly loud national debate on U.S. trade policy that’s been supercharged by President Trump’s election, you’ll be really surprised by the results of this morning’s latest report from the U.S. Labor Department on America’s labor productivity. And if you haven’t been following the debate, you should be – as both trade policy generally and the productivity angle are really important for the nation’s future prosperity.

The big surprise (which has actually been unfolding for years now): On the one hand, folks who support current trade policies (meaning nearly the entire political, business, and media establishments in this country) insist that the president is wrong to blame these policies for the steep manufacturing job drop the nation has experienced for so long. Instead, they argue, productivity growth is the real culprit – manufacturers are using technology and better management to produce more and more goods with fewer and fewer workers. (Do I really need to provide links?) And complaining about technological progress and managerial improvements makes little sense – at best.

On the other hand, labor productivity – a relatively narrow but still crucial measure of efficiency, which is widely regarded as the prime long-term driver of American living standards – has been growing ever slower for many years now, even as manufacturing employment has tanked. The relationship certainly doesn’t track exactly over the short-term. But long-term, it strongly indicates that something other than better productivity has hammered the manufacturing labor market.

For example, during the 1990s economic expansion, when manufacturing employment dipped by only 0.38 percent, manufacturing labor productivity rose by 46.78 percent. (We’re going to compare expansions because that method yields the best – i.e., apples-to-apples – data.) During the shorter 2000s expansion, many more manufacturing jobs were lost – 12.44 percent of the nation’s remaining total. But the sector’s labor productivity improved by only a little less – 41.08 percent.

During the current economic expansion, which is still more than two years shorter than its 1990s predecessor but nearly two years longer than the 2000s expansion, manufacturing employment has actually risen by 4.68 percent. But industry’s labor productivity is up by just 22.88 percent. That’s less than half the rate of the 1990s expansion, which saw hardly any manufacturing job loss.

As for the latest manufacturing labor productivity figures – during a period when manufacturing employment has resumed falling – they’ve been miserable. In the second quarter of last year, it fell sequentially by 0.50 percent on an annualized basis. In the third quarter, it inched back up 0.04 percent. Finally, as reported this morning, manufacturing productivity increased by 0.72 percent.

In the rest of the economy (technically the non-farm business sector, according to the Labor Department), labor productivity has risen faster over the short run. After declining sequentially by an annualized 0.15 percent in the second quarter of last year, it rebounded by 3.49 percent in the third. Even better, that number was revised significantly upward – from 3.03 percent.

Yet that third quarter jump could well be an anomaly. Today’s preliminary fourth quarter figure was down to a 1.29 percent annualized gain, and during the current economic recovery, overall labor productivity has advanced by only 7.96 percent. The comparable numbers for the previous two recoveries? 23.01 percent and 16.07 percent, respectively.

Nothing has been heard from President Trump about the productivity growth slowdown, but he has certainly expressed alarm about the state of domestic manufacturing – historically, the American economy’s productivity growth leader. Because productivity growth is so central to national economic success, he’ll need to focus even more intently and precisely on such issues if he wants his presidency to go down as an historical winner.