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

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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

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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. 

(What’s Left of) Our Economy: Why Amazon.com Could Kill the Entire Economy

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Amazon.com, bubble decade, bubbles, consumption, credit, Financial Crisis, gig economy, Great Depression, Great Recession, Henry George School of Social Science, housing, housing bubble, production, productivity, Robin Gaster, {What's Left of) Our Economy

Yesterday I was in New York City, on one of my monthly trips to attend board meetings of the Henry George School of Social Science, an economic research and educational institute I serve as a Trustee. And beforehand, I was privileged to moderate a school seminar focusing on the possibly revolutionary economic as well as social and cultural implications of Amazon.com’s move into book publishing.

You can watch the eye-opening presentation by economic and technology consultant Robin Gaster here, but I’m posting this item for another reason: It’s an opportunity to spotlight and explore a little further two Big Think questions raised toward the event’s end.

The first concerns what Amazon’s overall success means for the rough balance that any soundly structured economic needs between consumption and production. As known by RealityChek readers, consumption’s over-growth during the previous decade deserves major blame for the terrifying financial crisis and ensuing Great Recession – whose longer term effects have included the weakest (though longest) economic recovery in American history. (See, e.g., here.)

Simply put, the purchases (in particular of homes) by too many Americans way outpaced their ability to finance this spending responsibly, artificially and unprecedentedly cheap credit eagerly offered by the country’s foreign creditors and the Federal Reserve filled the gap. But once major repayment concerns (inevitably) surfaced, the consumption boom was exposed as a mega-bubble that proceeded to collapse and plunge the entire world economy into the deepest abyss since the Great Depression of the 1930s.

As also known by RealityChek regulars, U.S. consumption nowadays isn’t much below the dangerous and ultimately disastrous levels it reached during the Bubble Decade. And one of the points made by Gaster yesterday (full disclosure: he’s a personal friend as well as a valued professional colleague) is that by using its matchless market power to squeeze its supplier companies in industry after industry to provide their goods (and services, in the case of logistics companies) at the lowest possible prices, Amazon has delivered almost miraculous benefits to consumers (not only record low prices, but amazing convenience). But this very success may be threatening the ability of the economy’s productive dimension to play its vital role in two ways.

First, it may drive producing businesses out of business by denying them the profitability needed to survive over any length of time. Second, Amazon’s success may encourage so many of its suppliers to stay afloat by cutting labor costs so drastically that it prevents the vast majority of consumers who are also workers from financing adequate levels of consumption with their incomes, not via unsustainable borrowing. Indeed, as Gaster noted, it may push many of these suppliers to adopt Amazon’s practice of turning as much of it own enormous workforce into gig employees – i.e., workers paid bare bones wages and denied both benefits and any meaningful job security. And that can only undermine their ability to finance consumption responsibly and sustainably. 

I tried to identify a possible silver lining: The pricing pressures exerted by Amazon could force many of its suppliers to compensate, and preserve and even expand their profits, by boosting productivity. Such efficiency improvements would be an undeniable plus for the entire economy, and historically, anyway, they’ve helped workers, too, by creating entirely new industries and related new opportunities (along, eventually, with higher wages). Gaster was somewhat skeptical, and I can’t say I blame him. History never repeats itself exactly.

But to navigate the future successfully, Americans will need to know what’s emerging in the present. And when it comes to the economic impact of a trail-blazing, disruption-spreading corporate behemoth like Amazon, I can think of only one better place to start than Gaster’s presentation yesterday –  his upcoming book on the subject. I’ll be sure to plug it here on RealityChek as soon as it’s out.

(What’s Left of) Our Economy: The AP’s Manufactured Nonsense About Manufacturing

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AP, Associated Press, Calvin Woodward, fake news, innovation, Jobs, manufacturing, productivity, research and development, technology, Trump, {What's Left of) Our Economy

The Associated Press (AP) is a ginormous global news organization, and its reach is especially widespread here in the United States (although I couldn’t find figures breaking out its American clientele specifically). So it’s a big deal when one of its highest profile writers spreads the kind of utter claptrap about domestic U.S. manufacturing that Calvin Woodward just peddled in his new piece on President Trump’s views on the economy.

In an article posted today, Woodward portrayed Mr. Trump’s emphasis on industry (and other elements of his worldview) as nothing more than a pathetic and downright dangerous exercise in nostalgia for the “grunt work of old” that ignores how “Industry, technology and much of the culture are finding new ways of doing and living” and how “U.S. prosperity has been driven for decades by services, technology and new things….”

Some confidence in Woodward’s conclusions might be justified if he relied on manufacturing specialists or even economists to support them. But the authorities he cites are a “professor of communications” and a psychologist who “studies nostalgia from Britain’s University of Southampton.”

Not that economists have been killing it in recent decades in properly evaluating the importance of manufacturing. But if Woodward had bothered to consult one,  the odds would have been higher that he’d have encountered the idea that industry is kind of important for any country seeking to build or maintain a world-class military. Or” that it’s historically been the U.S. economy’s leader in productivity growth (although as RealityChek regulars know, it’s recently been losing its mojo on that score). Or that it boasts one of the nation’s biggest employment multipliers – meaning that the creation of each American manufacturing job generates an outsized number of jobs elsewhere in the economy compared with employment increases in most other sectors. Or that manufacturing accounts for the lion’s share of American business research and development spending. 

That last fact is especially important for Woodward and others of his ilk to know. For it makes clear that if the United States is to keep generating the “technology and new things” that of course are central to its hopes for continued (much less greater) prosperity, it has better keep its manufacturing base world class.

I’ll leave it to you to judge whether Woodward’s article qualifies as Fake News.  But there can’t be any legitimate doubt that it’s manufactured nonsense.   

Making News: Breitbart Podcast of Recession Gloom-Mongering Interview Now On-Line…& More!

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Breitbart News Tonight, IndustryToday.com, Making News, productivity, recession, Trump

I’m pleased to announce that the podcast is now on-line of my Tuesday night interview on Breitbart News Tonight on evidence that many of President Trump’s opponents have launched a politically inspired campaign to talk the U.S. economy into a recession.  To listen, click here and scroll all the way down until you see the September 10 interviews – since for some reason, the podcasts aren’t arranged in chronological order.

Also, IndustryToday.com has re-posted two RealityChek columns this week – the first was the offering originally documenting recession gloom-mongering claims, and the second was the item on puzzling trends in productivity growth in America.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

 

(What’s Left of) Our Economy: Economic and Political Productivity Puzzles

Tags

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

It’s U.S. labor productivity data time – in other words, the point at which all Americans interested in their economy and its future should be examining the latest news about a major measure of economic efficiency that speaks volumes about the nation’s chances of boosting living standards on a healthy, sustainable, rather than bubble-ized and therefore dangerous, basis.

And the Labor Department figures released last week continue to show a split personality performance: decent results for non-farm businesses (the Department’s main category for the economy as a whole), and woeful, worsening results for manufacturing.

According to these revised numbers for the second quarter of the year, output per each hour on the job by each worker (the narrower but most timely of two productivity measures tracked by Labor), increased over the first quarter’s level by the same 2.3 percent annual rate initially reported. In manufacturing, however, the originally published 1.6 percent annualized sequential decline is now judged to be a 2.2 percent drop – the worst such performance since the four percent nosedive in the third quarter of 2017.

As shown in the table below, the new data leave the current economic expansion (which began in mid-2009) as a major labor productivity laggard. After all, the cumulative growth rate for non-farm businesses is little better than half that of the 1990s expansion, even though they lasted for approximately the same period of time. And it’s even slower than the labor productivity growth rate of the bubble decade’s expansion – which was about 40 percent shorter. As for manufacturing, the table makes clear that the deterioration has been much greater.

                                                                          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 prelim 2Q 19):  +12.80 percent      +9.19 percent

current expansion (2Q 09 thru revised 2Q 19):     +12.80 percent      +9.02 percent

Nonetheless, the new figures do contain some good news for President Trump. So far during his administration, overall labor productivity has grown faster than during the last comparable period under former President Obama. Manufacturing labor productivity has grown more slowly, but the difference is only fractional:

                                                                         Non-Farm business   Manufacturing

last 8 Obama quarters:                                         +1.33 percent        +0.38 percent

first 8 Trump quarters:                                         +3.46 percent        +0.25 percent

Even better, although the second quarter’s non-farm business annualized 2.3 percent labor productivity growth was lower than the first quarter’s 3.5 percent, the trend under Mr. Trump has generally been up. During those last two Obama years, the growth rate slowed significantly. In manufacturing, however, the momentum picture has been the reverse – modest but overall strengthening under Obama, major weakening under Mr. Trump.

One reason for this recent manufacturing deterioration could actually be good news politically for the President and his supporters: During his months in office so far, manufacturing workers’ compensation cumulatively has risen at more than twice the rate (8.52 percent) than during the final eight quarters of the Obama administration (4.06 percent). And workers, of course, are often voters.

Yet this development brings up a real puzzle: When it comes to non-farm businesses, the Trump productivity performance has been considerably better than the Obama even though compensation under the current administration has also risen much faster (11.30 percent cumulatively) than during the comparable period under the previous administration (6.96 percent).

On the one hand, puzzling productivity results aren’t all that puzzling, since most economists admit that it’s the performance measure that’s the most difficult to track. On the other, these Obama-Trump puzzles look pretty mysterious even by productivity’s standards.

(What’s Left of) Our Economy: U.S. Manufacturing’s Productivity Lag Just Got Even Worse

Tags

BLS, Bureau of Labor Statistics, labor productivity, manufacturing, multi-factor productivity, non-farm business, productivity, total factor productivity, {What's Left of) Our Economy

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.”

(What’s Left of) Our Economy: U.S. Manufacturing’s Productivity Lag Keeps Worsening

Tags

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

They’re not as exciting as the trade data and the jobs data these days. In fact, they rarely generate any excitement. And this year, they had the misfortune of coming out on the 75^th anniversary of D-Day. All the same, last Thursday’s second set of government figures on labor productivity for the first quarter of this year matters because it strengthened the case for a disturbing trend: Although this measure of efficiency – and indirectly, success in fostering healthy growth and sustainably rising living standards – confirmed the initial encouraging results for the economy as a whole, manufacturing’s laggard status looks worse than ever..

As RealityChek regulars know, the labor productivity measured in last week’s report is the narrower of the two productivity gauges regularly published by the Department of Labor. As opposed to multi-factor productivity, which measures how much in the way of a variety of business inputs is needed to generate a unit of output, labor productivity only tells us how much each hour of work put in by an employee achieves that result. But the labor productivity figures come out on a timelier basis, so they’re understandably watched closely.

The release’s headline figure confirmed the solid labor productivity gain originally reported for the first quarter in the “non-farm business” sector – the Department’s definition of the American economic universe when it comes to productivity. Although the 3.4 percent annualized sequential rate of improvement was a little slower than the first 3.6 percent estimate, it remained the best such result since the 3.7 percent recorded for the third quarter of 2014. Moreover, it still left labor productivity growth accelerating since the third quarter of last year.

For manufacturing, however, the first quarter’s sequential labor productivity increase was revised way down – from a pretty good 1.7 percent to a dismal 0.4 percent.

Even worse, whereas non-farm business productivity improved because both output and hours worked rose (the productivity gain recipe we want to see), the much smaller increase for manufacturing stemmed from hours worked dropping even faster than output (the productivity gain recipe we don’t want to see).

As a result of this poor manufacturing performance, the labor productivity gap between industry and the rest of the economy has been widening – and not in a good way for industry. Here’s an updated table showing the total labor productivity gains for non-farm businesses and for manufacturing during the two previous economic expansions and the current expansion (in order to ensure apples-to-apples comparisons).

                                                               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 to present): +12.18 percent          +9.59 percent

It’s worrisome enough that the non-farm business increases have been decelerating since the 1990s expansion. But the extent of the manufacturing slowdown has been nothing less than shocking. Indeed, during the current recovery, manufacturing has clearly lost its labor productivity leadership status – and by a considerable margin.

Alternatively put, even though the 1990s expansion and the current expansion have lasted roughly the same amount of time, the rise in non-farm labor productivity during this recovery has been only about half as fast, and that for manufacturing only about a fifth as fast.

American manufacturing has shown some important signs of revival under President Trump – especially in job creation and output (at least until recently). But whatever the results of Mr. Trump’s trade wars, unless its labor productivity performance improves dramatically, its comeback will remain sorely incomplete.

(What’s Left of) Our Economy: A Sort of Mixed U.S. Productivity Report

Tags

labor productivity, manufacturing, non-farm business, productivity, {What's Left of) Our Economy

This morning’s government report on labor productivity for the first quarter of this year contained a valuable reminder that this measure of the economy’s efficiency – and indirectly, its success in fostering healthy growth and sustainably rising living standards – can improve for good and not-so-good reasons. And the complicating factor in an otherwise strong set of data came in manufacturing.

Labor productivity, as RealityChek regulars know, is the narrower of the two productivity gauges regularly published by the Department of Labor. As opposed to multi-factor productivity, which measures how much in the way of a variety of business inputs is needed to generate a unit of output, labor productivity only tells us how much each hour of work put in by an employee achieves that result. But the labor productivity figures come out on a timelier basis, so they’re understandably watched closely.

As suggested above, the overall figures were encouraging. For non-farm businesses (the Labor Department’s U.S. economy universe), labor productivity rose by 2.40 percent between the first three months of 2018 and the first three months of this year. That was the best such performance since the third quarter of 2010 (2.70 percent), and especially good news since that previous mark came much earlier in the current business cycle (i.e., much sooner after the end of the last severe recession), when robust productivity gains are generally easier to generate.

Moreover, these labor productivity advances have accelerated sequentially since the third quarter of last year.

In addition, on a quarter-to-quarter basis, the first quarter’s 3.60 percent increase at an annual rate was this metric’s best performance since the 3.70 percent rise in the third quarter of 2014.

Manufacturing’s 1.20 percent productivity improvement over the first quarter of 2018 wasn’t stellar, but pretty much in line with recent readings. The new quarter-to-quarter reading, though, was solid; industry’s labor productivity was up 1.70 percent annualized – the best such performance since the 4.40 percent pop in the fourth quarter of 2017. And the rate of increase here had sped up since the third quarter of last year as well.

The fly in the ointment concerns why first quarter manufacturing labor productivity even rose at that solid quarter-to-quarter pace. A big part of the reason was that manufacturing output fell during this period – by one percent at an annual rate. In other words, the sector reduced the number of hours its workers worked, but it also saw production fall – just more slowly. That result is certainly better than output falling just as fast or faster than hours worked. But it doesn’t qualify as “good.”

The latest sequential manufacturing annualized output decrease is the first since the 1.50 percent decline in the third quarter of 2017 (when the sector’s productivity sank by a recessionary 4.40 percent at an annual rate). Industry’s labor productivity rebounded sharply in the following quarter (by 4.20 percent annualized, while output shot up by 5.70 percent). So maybe this latest lousy output number is just another bump in the road.

But it’s that combination that represents the best possible labor productivity outcome: Both output and efficiency rising at the same time.

It’s also important to remember, however, that both the economy overall and the manufacturing sector still aren’t close to returning to their labor productivity performances of the recent past. Here are the updated comparisons between the current recovery, and its two most recent predecessors:

                                                                 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 to present):    +12.17 percent          +9.96 percent

The newest quarterly figures brighten the picture slightly. But boasting about the U.S. economy should definitely be muted until these productivity numbers start turning around dramatically.

(What’s Left of) Our Economy: Manufacturing’s Productivity Leaders Continue to Surprise

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aerospace, aluminum, appliances, Bureau of Labor Statistics, durable goods, labor productivity, manufacturing, non-durable goods, pharmaceuticals, productivity, semiconductors, steel, {What's Left of) Our Economy

One of my favorite sets of U.S. government statistics came out this morning – “Productivity and costs by industry: manufacturing and mining industries.” However boring it sounds, it’s useful because it sheds lots of light on which specific sectors within domestic American manufacturing should be seen as winners and losers or “industries of the future” (presumably the productivity stars) versus smokestack and other allegedly outmoded types of activity (the productivity laggards).

In addition (and this will be covered in an upcoming post), these detailed figures on manufacturing labor productivity (the narrowest of the two types of productivity tracked by the feds, but the measure that comes out on the timeliest basis) go far toward showing whether job loss in manufacturing lately has mainly been due to trade and globalization, or to industry’s improved efficiency. This debate of course has long been near or at the heart of the broader, decades-long debate about the effectiveness of American trade policies.

First let’s look at the overall numbers – which are anything but flattering to manufacturing. According to the Bureau of Labor Statistics (which compiles these data), in 2018, when manufacturing’s labor productivity as a whole rose by 0.80 percent, it fell in absolute terms in 67 out of the 86 sectors examined. That was a worse performance than in 2017. Even though that year, overall manufacturing labor productivity improved by slightly less (0.70 percent), it decreased in 54 of those 86 industries.

Broken down by super-categories, in 2018, in the 51 durable goods industries followed by the Bureau, labor productivity declined in 41. In the non-durables super-sector, labor productivity dropped in 26 of 35 sectors studied. For 2017, the comparable numbers were 34 of 51 and 20 of 35, respectively.

Even more interesting, in my view, are the results for these 86 individual industries. First, the ten best labor productivity performers in 2018 and their annual percentage gains. As you’ll see, the list that isn’t exactly dominated by advanced technology, at least according to the most popular definitions and portrayals. (FYI, “magnetic media” are a fancy name for products like audio tapes and compact disks – which this aging baby boomer is constantly told are hopelessly outdated.)

magnetic media mfg & reproducing:               +9.1 percent

computer & peripherals mfg:                          +7.7 percent

leather/hide tanning & finishing:                    +6.5 percent

grain & oilseed milling:                                  +5.3 percent

miscellaneous textile product mills:               +5.2 percent

turbine & power transmission equip:             +4.6 percent

resin, rubber, & artificial fibers:                    +3.5 percent

cut and sew apparel:                                      +3.2 percent

agricultural chemicals:                                  +2.2 percent

miscellaneous transport equip:                      +2.1 percent

And here’s a list of the 2018’s ten worst labor productivity performers. Most appear to be “lower tech.” But look at aerospace at Number Five! That’s the economy’s biggest trade surplus winner! The huge automotive sector had a terrible labor productivity year, too.

lime & gypsum products:                             -11.8 percent

textile fabric & finishing mills:                    -11.3 percent

motor vehicle bodies & trailers:                  -10.1 percent

sawmills & wood preservation:                    -9.5 percent

aerospace products & parts:                         -8.1 percent

petroleum & coal products:                         -7.8 percent

motor vehicles:                                            -7.6 percent

sugar & confectionary products:                 -7.1 percent (tie)

apparel knitting mills:                                 -7.1 percent (tie)

audio & video equipment:                           -6.9 percent

beverages:                                                    -6.1 percent

Finally, here are some labor productivity numbers for some manufacturing sectors of special interest. Pharmaceuticals seems a logical choice to kick it off, given the role that healthcare and drug-pricing issues have been playing lately in national policy and political debates. Its 2018 labor productivity fall-off indicates that if the industry improved its efficiency, it wouldn’t need such sky-high prices for many of its products to achieve what it considers adequate profitability. 

pharmaceuticals & medicines:                    -3.4 percent

iron & steel mills & ferroalloys:                 -2.4 percent

alumina & aluminum production:               -2.3 percent

household appliances:                                +1.6 percent

The next three sectors have been prominent in trade policy controversies. The two metals sectors faltered on the labor productivity front last year. (In 2017, both produced considerably better results). But if you look at their labor compensation costs (also provided in today’s productivity release), you’ll see that they’ve at least shared many of the benefits of the protective tariffs they’ve received with their workforces.

Such compensation rose by 7.2 percent for iron and steel-makers, and five percent for the aluminum industry. Both increases handily beat the 1.70 percent average for all manufacturing, and the 1.40 percent for durable goods production.

Household appliances – which include tariff-ed large household laundry machines) – turned in the opposite performance. Labor productivity was up at a relatively strong pace. But labor compensation was off by 2.20 percent. (Even more unusual, its labor productivity fell in 2017, while labor compensation surged.)

Finally, let’s examine the semiconductor sector, since it’s commonly described as a main “building block” of the entire high tech portion of the American economy. In 2018, its labor productivity fell (by 1.20 percent) – and for the third straight year. But here, labor compensation was way up (by 5.60 percent).

Intellectually honest economists will admit that measuring productivity is one of their most challenging tasks. But it’s also inescapable.  And the new detailed manufacturing labor productivity data make clear that identifying the nation’s most and least valuable and promising manufacturing industries remains just as challenging.