(What’s Left of) Our Economy: New Figures Show that America is Still Pretty Unproductive

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CCP Virus, coronavirus, COVID 19, inflation, labor productivity, manufacturing, non-farm business, productivity, recession, total factor productivity, Wuhan virus, {What's Left of) Our Economy

Let’s start off with the good news revealed by today’s final (for now) official U.S. report on labor productivity in the fourth quarter of 2022 and the entire year last year: The quarterly readings have now improved for the fourth consecutive time, and have even showed actual growth for the second straight quarter.

That’s sure better than America’s performance earlierin 2022 for this narrowest of the two productivity growth gauges tracked by the U.S. government. Last year’s first half featured the first quarter’s 6.1 percent drop at annual rates (tying the second quarter, 1960 for the worst such performance ever in a data series going back to 1947) and a second quarter 3.8 percent annualized decrease that created the worst back-to-back results ever.

And any positive productivity news is important any time because robust productivity gains are the country’s best bet for achieving sustainable prosperity rather than the bubble-ized veneer of economic success. Moreover, any positive productivity news these days is especially important, because enough improving efficiency on this score would cool off inflation. For all else (particularly demand levels) equal, it would enable businesses to absorb higher costs for labor and other inputs and still maintain their profits rather than being forced to preserve profitability by raising prices charged to consumers and other final customers.

But that’s it for this morning’s good productivity news.

Although the new fourth quarter rise of 1.7 percent annualized (for non-farm businesses – the government’s closest proxy for the entire private sector economy) was the best since the three percent improvement registered in the fourth quarter of 2021, it was 1.3 percentage points lower than the three percent reported in the advance release.

Further, the 1.7 percent yearly fall-off in labor productivity between 2021 and 2022 was the greatest such weakening since the same decrease in 1974.

Although there’s no legitimate doubt that recent productivity data are still reflecting CCP Virus-related distortions that presumably will fade significantly at some point, the latest number’s unfortunately provide no reasons to think that America’s long-time productivity growth slump will end any time soon. Here are the results, incorporating new “benchmark” revisions for the last few years, for all the expansions that the U.S. economy has enjoyed since the 1990s. (As known by RealityChek regulars, the most reliable economic comparisons are those among the same periods of business cycles.)

1990s expansion (2Q 1991-1Q 2001): +23.53 percent

bubble-decade expansion (4Q 2001-4Q 2007): +16.01 percent

pre-CCP Virus expansion: (2Q 2009-4Q 2019): 13.56 percent

post-CCP Virus expansion: (3Q 2020-4Q 2022): -1.32 percent

Again, maybe American business is still suffering from pandemic era doldrums. But obviously something awfully dramatic is going to have to change to reverse this discouraging trend.

Even worse, as I see it, have been the latest results in manufacturing labor productivity. The reason? As the table below shows, industry used to be far and away the nation’s productivity growth leader – at least until the pandemic struck.

1990s expansion (2Q 1991-1Q 2001): 44.70 percent

bubble-decade expansion (4Q 2001-4Q 2007): 31.05 percent

pre-CCP Virus expansion: (2Q 2009-4Q 2019): 2.11 percent

post-CCP Virus expansion: (3Q 2020-4Q 2022): -1.00 percent

Since the post-pandemic recovery, manufacturing’s labor productivity swoon has been marginally milder than that for non-farm business overall. But for the last two quarters of 2022, its perfomance has been worse, as its labor productivity has sunk by 3.9 percent and 2.7 percent at annual rates. And in fact, it’s fallen in absolute terms for five of the last six quarters.

But maybe the broader measure of productivity growth, total factor productivity (TFP) growth, yields better results? TFP measures how much expansion of output businesses are getting from the use of man different inputs – materials, energy, technology, capital spending, and the like, as well as labor. So it provides a more complete picture of business efficiency. But the TFP numbers only come out annually, and with more of a delay than the labor productivity results.

Yet even keeping in mind the inability to generate TFP growth statistics for the precise extent of expansions, and the delay factor, the results we do have so far don’t differ substantially from the labor numbers in terms of the long-term weakening – especially of manufacturing. Here are the results for non-farm businesses for the closest annual approximations of recent economic expansions:

1990s expansion: 1991-2000: 10.11 percent

bubble-decade expansion (2002-2007): 6.65 percent

pre-CCP Virus expansion: (2009-2019): 6.06 percent

post-CCP Virus expansion: (2020-2021): 4.13 percent

And here are the same results for manufacturing:

1990s expansion (1991-2000): 15.64 percent

bubble-decade expansion (2002-2007): 11.67 percent

pre-CCP Virus expansion: (2009-2019): 1.55 percent

post-CCP Virus expansion: (2020-2021): 3.26 percent

Since the deep pandemic-induced recession of 2020, TFP growth looks pretty impressive. But we only have a single year’s worth of data. And the 2022 numbers don’t come out till March 23. Most economists agree that productivity is the hardest of the economy’s standard performance indicators to measure, so even the upcoming TFP report may contain some big encouraging surprises. And even if it doesn’t, it’s conceivable that it’s missing much of the real productivity story.

Yet since both measures used by the government are in basic agreement, that last argument isn’t one I find persuasive. Worse, as long as American productivity growth remains crummy – and possibly non-existent – fostering a dramatic economic slowdown and quite possibly a recession will be the only ways to defeat today’s troubling inflation.

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Im-Politic: The Regime Media’s Illegal Aliens Cover-Up Continues

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Biden border crisis, child labor, Financial Times, illegal aliens, Im-Politic, Immigration, labor productivity, Mainstream Media, meatpacking, productivity, Regime Media, UniParty, Washington Post, workers

The evidence keeps mounting that the Uniparty’s Regime Media will stop at almost nothing to cover up the costs of illegal immigration to the U.S. economy and American society. Just yesterday, as I tweeted, the Financial Times published a report claiming that a labor shortage fueled in large measure by flows of legal and illegal immigrants allegedly so inadequate that resulting worker shortages are imperiling President Biden’s infrastructure and manufacturing revival plans.

Only one problem: The reporter and her editors completely failed to mention that the wages offered by U.S. construction firms have gone exactly nowhere at best lately – which is hard to square with the idea that they’re desperate to hire.

And this morning, I noticed a Washington Post report on the shameful reappearance of illegal child labor in the United States – including child employees exposed to dangerous working conditions – that buried unmistakable signs that continuing inflows of illegal aliens obviously enabled by President Biden’s lax border enforcement policies bear at least much of the blame.

In the fifth paragraph, the article states that

“Child labor violations have been on the rise in the United States since 2015. The number of minors found to be employed in violation of child labor laws shot up by 37 percent between 2021 and 2022. The number of children found to be illegally employed in hazardous occupations, such as meatpacking and construction, spiked by 93 percent over the past seven years.”

That’s certainly important to know. And in the following graph, readers learn that “Experts say a historically tight labor market could be fueling this rise in violations, with employers tapping into new labor pools to fill vacancies across a variety of industries.”

But it’s not until paragraph seventeen that the piece even obliquely mentions the illegal aliens angle:

“Many of the children [working at the meatpacking facilities focused on in the article] spoke only Spanish, and at least some Labor Department interviews with minors were conducted in Spanish, investigators [who were probing labor law violations for the federal government] said.”

Yet the article still never disclosed why these unilingual children are in the country to begin with – no doubt because their presence is surely unlawful, and a testament to the humanitarian impact of the Open Borders-friendly immigration policies pushed so avidly and for so long by major U.S. news organizations.

Also conspicuously overlooked in this Post report – the harmful economic impact of the long-time absence of sensible immigration policies. In this case, strong productivity growth is the casualty, which matters decisively because ever greater efficiency is a key – and probably the most important key – to America’s ability to generate high and rising living standards. And the evidence could not be clearer that the ready availability of illegal alien labor has enabled the nation’s meat-processing industry to remain profitable without automating or shaking up management or reconfiguring its production lines or taking any other major steps to modernize.

I last looked at that sector’s lagging performance in labor productivity (where the data is most up to date) in May, 2020, and here’s where the situation stands now: In the non-durable manufacturing sector, where meat processing is found, from the first quarter of 1987 through the fourth quarter of last year improved by 71.62 percent. But between 1987 and 2021, it rose in “animal slaughtering and processing” by just 13.98 percent.

And for those doubting the illegal immigrant connection, this 2021 Fact Sheet, issued by an organization bent on highlighting “the many different ways that undocumented immigrants contribute to the food supply chain in the United States,” puts the number of illegal alien workers in slaughtering and processing companies at 82,700 in 2019. If that’s accurate, then according to the official employment data for that sector, that came to nearly one in every five employees at year!

The bottom line:  The resumed illegal immigration tide fostered by the Biden administration has helpd bring about resumed economic woes and exploitation. If I was shilling for the Cheap Labor Lobby, or ideologically wed to Open Borders, I guess I’d want to cover that up, too.   

Our So-Called Foreign Policy: A Wall Street Kingpin Lays a Grand Strategy Egg

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America First, China, climate change, ESG, fossil fuels, globalism, globalization, Immigration, industrial policy, Jamie Dimon, JPMorgan Chase, Our So-Called Foreign Policy, productivity, supply chains, The Wall Street Journal, Ukraine War, Wall Street, woke capitalism

In several senses, it’s not entirely surprising that The Wall Street Journal recently allowed Jamie Dimon to share his thoughts on the domestic and especially global grand strategies the United States should pursue in the post-Ukraine War world.

After all, Dimon heads JPMorgan Chase, the nation’s biggest and most important bank. As a result, he clearly needs to know a lot about the U.S. economy. And as Wall Street’s biggest poohbah, he surely must know a lot about the state of the world overall – in particular since he’s had extensive contacts with the heads of state, senior officials, and business leaders of many countries.

What is somewhat surprising, then, is how little of Dimon’s analysis and advice is new or even interesting, and how much of it could well put America ever further behind the eight-ball.

Dimon’s article wasn’t completely devoid of merit. Since he’s dabbled in some (symbolic) woke-ism himself, it was good to see him seemingly take a shot at what’s become mainstream liberal as well as radical lefty dogma by urging the education of “all Americans about the sacrifice of those who came before us for democracy at home and abroad.”

Given the strong support by the Biden administration and by some finance bigwigs for influential for encouraging and even requiring lenders to take climate change risks into account when extending credit, it was encouraging to read his pragmatic position that “Secure and reliable oil and gas production is compatible with reducing CO2 over the long run, and is far better than burning more coal.”

Dimon showed that, unlike many on Wall Street, he supports some forms of industrial policy to make sure that “we don’t rely on potential adversaries for critical goods and services.”

And he endorsed the larger point that the neoliberal globalization-based triumphalism that undergirded the policies of globalist pre-Trump Presidents needs to be buried for good:

“America and the West can no longer maintain a false sense of security based on the illusion that dictatorships and oppressive nations won’t use their economic and military powers to advance their aims—particularly against what they perceive as weak, incompetent and disorganized Western democracies. In a troubled world, we are reminded that national security is and always will be paramount, even if it seems to recede in tranquil times.”

But on most of the biggest issues and just about all specifics, Dimon either punted or retreated into the same globalist territory that proved as profitable for Big Finance as it was too often dangerously naive for the nation as a whole.

For example, he wants Washington to “fix the immigration policies that are tearing us apart, dramatically reducing illegal immigration and dramatically increasing legal immigration.” Completely ignored is the depressing impact the latter would have on wages that have already been falling recently in inflation-adjusted terms, and on desperately needed productivity growth – as a bigger supply of cheap labor is bound to kill many incentives for businesses to improve their efficiency by innovating technology-wise or devising better management approaches.

And on China, Dimon’s clearly determined to talk his company’s book, insisting that “We should acknowledge that we have common interests in combating nuclear proliferation, climate change and terrorism.” and blithely predicting that “Tough but thoughtful negotiations over strategic, military and economic concerns—including unfair competition—should yield a better situation for all.”

But most important, Dimon fully endorses the foundations of the very globalist strategy that for decades perversely ignored the distinctive and paramount advantages the United States brings to world affairs and has thereby created many of the dangers and vulnerabilities with which the nation has been struggling.

The way Dimon seems to see it, there’s no reason to pay any attention to the extraordinary degree of security the America enjoys merely by virtue of its geographic isolation and powerful military; or to its extraordinary degree of economic self-sufficiency thanks to its immense and diverse natural resource base, its technological prowess, and its dynamic free market-dominated economic system. And evidently, it’s just as pointless to concentrate foreign and economic policy on the nation’s equally formidable potential to build on these advantages.

Instead, like other globalists, Dimon flatly rejects the idea that “America can stand alone,” or should seek to maximize its ability to do so. Instead, it should keep defining nothing less than “global peace and order” as “a vital American interest” – the standard globalist recipe for yoking the country’s fate to an agenda of more open-ended military interventions, more hastily approved and usually wasteful foreign aid, and more nation-building in areas lacking any ingredients of nation-hood.

Asa result, it would anchor America’s safety and prosperity on efforts to shape foreign conditions (over which is has relatively little control), rather than on efforts to shape domestic conditions (over which is has much more control). (For a much fuller description of this America First strategy and its differences with globalism, see this 2018 article.) 

In fact, and revealingly, Dimon’s piece was titled “The West Needs America’s Leadership.” If only he and other globalists would start thinking seriously about what America really needs. 

(Full disclosure:  I own several JPMorgan bond and preferred stock issues.)    

 

(What’s Left of) Our Economy: No, Immigration Curbs Haven’t Caused U.S. Labor Shortages

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CCP Virus, Center for Immigation Studies, coronavirus, COVID 19, immigrants, Immigration, Karen Ziegler, Labor Force Participation Rate, labor shortages, LFPR, prime-age population, productivity, Steven A. Camarota, Trump administration, wages, workers, {What's Left of) Our Economy

Thanks to the non-partisan Center for Immigration Studies (CIS), one of the biggest and most harmful recent claims about the American economy has been exposed as a sham: that the current shortages of labor about which employers keep whining are due to a shortage of immigrant workers spurred by the Trump administration’s restrictive policies and worsened by the CCP Virus pandemic.

As known by RealityChek regulars, the very idea of a chronic labor shortage – as opposed to the kinds of temporary supply and demand mismatches that occur regularly in every market-based economy – is un-serious mainly because the solution typically is so simple: raise wages enough to attract new employees. And standard labor shortage claims tend to be harmful because they’re usually covers for business demands for more mass immigration – which enables them to keep wages down rather than respond by investing in labor-saving equipment and improving efficiency in ways that boost productivity and therefore benefit the entire economy, especially long term.

But leaving such broader considerations aside, CIS, a Washington, D.C.-based think tank, has demonstrated that blaming immigration restrictions for all the Help Wanted signs that do indeed seem to be appearing all over the country is simply wrong on its face. According to a December 22 CIS study by Steven A. Camarota and Karen Ziegler, the biggest culprit by far is a continuing decline in the number of U.S.-born residents of the country looking for work.

The authors use Census data to show that although the number of immigrants (legal and illegal) working in America did fall from 27.8 million in November, 2018 (the Trump-era peak) and 27.7 million the following November (just before the pandemic arrived in the United States), by last month (the latest available) data, it was back up to 29.6 million. So there the immigrant worker population has not only recovered all of its pre-pandemic losses. It’s 1.9 million greater than its pre-CCP Virus level.

More important statisically speaking, that November, 2022 immigrant worker number is above the level it would have reached had this population’s growth trend going back to 2000 simply continued uninterrupted.

Meanwhile, the number of U.S.-born U.S. residents in the workforce has continued its long-term decline despite a modest rebound from pre-pandemic lows. The standard measure is the Labor Force Participation Rate (LFPR), which shows the share of working-age Americans are either on the job or looking for one.

The LFPR for all U.S.-born residents of the country fell from 77.3 percent in November, 2000 to 74.1 percent in 2019, dropped further in pandemic-y 2020, and has only bounced back modestly as of November, 2022 to 73.5 percent. And the post-2019 fall-offs for the most closely followed groups – “prime age” men and women, defined as the 25-54- year olds – have generally been steeper. As a result, the number of U.S.-born Americans at work now is 2.1 million smaller than in November, 2019.

In fact, Camarota and Ziegler calculate that if the total U.S. LFPR today was the same as in 2000, 6.5 million more U.S.-born residents would be either working or looking for work today. That’s 3.42 times more than the number of foreign-born residents who have been added to the working population during the pandemic era.

So whatever labor shortages have been experienced lately have been home-grown – and unrelated to immigration restrictions. And if the business community and others favoring more immigration were really interested in easing them meaningfully, they’d be spending more of their time figuring out how to attract more U.S.-born residents to the workplace. That wouldn’t boost national productivity or wages. But the social benefits of ending idleness and welfare dependency in the working-age population should hardly be ignored.

Unfortunately, as Camarota and Ziegler write, the push to fill the gap with immigrants both threatens to keep the native-born on the occupational sidelines and increase their vulnerability to crime, addiction, mental health issues, and obesity, as well as to “reduce political pressure from employers and society in general to address” the domestic LFPR decline.

(What’s Left of) Our Economy: The New Productivity Numbers Look Awfully Inflation-y

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consumers, demand, Federal Reserve, inflation, Labor Department, labor productivity, non-farm business, productivity, supply, {What's Left of) Our Economy

The new official U.S. figures on productivity growth are a good-but-mostly-bad news story.

The good news is that, at least for now, the American economy’s efficiency by this measure is no longer sinking like a stone – which was a real fear based on the absolute sequential declines recorded in the first and second quarter.

Further, even the feeblest improvement in productivity deserves applause because a more productive economy is (a) one better able to spur higher living standards on a sustainable basis; and (b) one less vulnerable to inflation (because it’s better able to close the gap between Americans’ demand for goods and services and the supply that’s available).

In addition, in the second quarter, labor productivity (which RealityChek regulars know is the narrower but timelier data tracked by Washington) sagged year-on-year by 2.06 percent. That figure for non-farm businesses (the Labor Department’s headline category) was slightly upgraded from the preliminary second quarter result, but that was still, as Labor reminded, “the largest [such] decline in the series, which begins in the first quarter of 1948.”

This morning’s data, the final (for now) numbers for the third quarter, show that  non-farm business labor productivity was off by just 1.25 percent on an annual basis. Moreover, on a sequential basis, labor productivity broke a two-quarter losing streak. After plummeting by 6.02 percent annualized in the first quarter and 4.13 percent at annual rates in the second, it grew by percent.

But the bad news is that this recent, ongoing annual decrease in non-farm business labor productivity has come on the heels of a long period of weakening U.S. performance on this front. Here are the numbers for total non-farm busnesses productivity growth presented for the last few stretches of American economic expansion (which generate the best apples-to-apples statistics):

1990s expansion (2Q 1991-1Q 2001): +23.53 percent

bubble expansion (4Q 2001-4Q 2007): +16.01 percent

pre-CCP Virus expansion: (2Q 2009-4Q 2019): 13.60 percent

And even though since the deep but brief pandemic-induced downturn ended in the second quarter of 2020, and the economy has remained massively distorted by the virus and its after effects, it’s still worth noting that since then, non-farm business productivity has sagged by 1.44 percent. This lower efficiency means, all else equal, that the economy has become less able to increase supply as fast as demand has grown, and therefore is more inflation-prone.

As also known by RealityChek regulars, the productivity statistics should be viewed at least somewhat skeptically, since especially when it comes to the service sector that dominates the U.S. economy, output per hour per worker (which yields the labor productivity numbers) is difficult to quantify. But the recent productivity deterioration has been so marked for so long that it can’t be seriously challenged. And until someone figures out how to get U.S. productivity growing vigorously again, expect too many dollars in the nation’s economy to keep chasing too few goods and services (a classic definition of inflation), and the price of these purchases to remain way too high for comfort – unless and until the Federal Reserve’s efforts to tame inflation really do succeed by crushing consumers’ buying power.      

(What’s Left of) Our Economy: How Labor Shortages Can Help U.S. Manfacturing – & the Entire Economy

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aerospace, aircraft parts, labor shortages, manufacturing, productivity, Reuters, {What's Left of) Our Economy

Here’s some advice for Reuters reporters Allison Lampert and Rajesh Kumar Singh, and their editors Kevin Krolicki and Bill Berkrot: If you’re going to produce a story showing that labor shortages are decimating output in a certain part of the economy, make sure they really are decimating output in a certain part of the economy. Because in the case of the U.S. aircraft parts sector on which their piece this morning focuses, it ain’t.

How do we know this? First of all, it’s true that “In the United States, aerospace employment” is below its “pre-pandemic level” (though by my calculations, the Labor Department data show the fall-off has been 7.66 percent from immediately pre-pandemic-y February, 2020 through last July) and not 8.4 percent, as the article contends). And that’s indeed much worse than the record compiled in manufacturing overall – which is up 0.52 percent during that period.

Further, the workforces in aircraft engines and engine parts are down even more sharply – by 8.94 percent and 14.88 percent, respectively.

But output “grounded,” as the headline claims? Not exactly. In fact, according to the Federal Reserve’s manufacturing production figures, output in the broad aerospace products and parts category has surged by 28.44 percent between February, 2020 and last month. In the narrower aircraft and parts grouping, the growth has been 30.60 percent.

And these numbers are inflation adjusted, meaning that they’re not being artificially boosted by price increases. They represent the volume of stuff being turned out. And they leave in the dust the results for manufacturing overall (up 3.69 percent in real terms since just before the CCP Virus arrived in force).

Even more striking, the output rebound in aerospace has remained strong recently. In that broad category, it’s jumped 10.38 percent year-on-year in August. For aircraft and parts, the surge has been an even faster 30.60 percent.

How can this be? The answer should be obvious to anyone who knows even a smidgeon of economics. These industries have become much more efficient. And indeed, official figures show that labor productivity in aerospace products and parts soared by 15.50 percent between 2020 and 2021 (the latest figures available). The comparable figure for all manufacturing? Just 3.30 percent. (As known by RealityChek regulars, the government also tracks a broader measure of productivity, called total factor productivity, but the detailed industry figures aren’t out yet.)

And here’s what’s totally weird: Steps taken by companies in aircraft parts to compensate for scarce workers, and plans to take more, were reported in the Reuters piece.

There’s no doubt that businesses in manufacturing overall and in aerospace in particular would love to have more workers – largely because demand for their products is exceptionally strong. But as the output and productivity data reveal, they’re figuring out how to solve this problem – and impressively.

That’s not only not a bad news story – it’s a great news story. And if other industries (including in the service sector) could remotely duplicate this performance, responding to labor shortages by making technological and other forms of progress, rather than by pleading for more mass immigration and other productivity-killing crutches, the entire economy and its prospects would be in much better shape than at present.

Glad I Didn’t Say That! The Latest Mainstream Media Misinformation on Manufacturing

Tags

Catherine Rampell, Glad I Didn't Say That!, Jobs, Mainstream Media, manufacturing, manufacturing production, productivity, Washington Post

“Contrary to myths that we’ve stopped ‘making’ things in the United States, we already manufacture a lot of stuff here. In fact, we manufacture nearly the most ‘stuff’ on record, as measured by the inflation-adjusted value of those products. We just happen to make that stuff with fewer workers than we used to, because technological advances have led to huge productivity gains.”

– Catherine Rampell, The Washington Post, September 8, 2022

U.S. manufacturing labor productivity since peak*: +4.00%

U.S. manufacturing employment since then: -7.18%

U.S. after-inflation manufacturing production since then: -3.58%

*December, 2007

(Sources: “The myth of the manufacturing comeback,” by Catherine Rampell, The Washington Post, September 8, 2022, https://www.washingtonpost.com/opinions/2022/09/08/biden-manufacturing-made-america/; “Labor productivity (output per hour),” Series Id: PRS 30006093, Major Sector Productivity and Costs, Databases, Tables & Calculators by Subject, Data Tools, U.S. Bureau of Labor Statistics, U.S. Department of Labor, https://data.bls.gov/pdq/SurveyOutputServlet; “All employees, thousands, manufacturing, seasonally adjusted,” Series Id: CES3000000001, Employment, Hours, and Earnings from the Current Employment Statistics survey (National), Ibid.; & “Industrial Production, Seasonally Adjusted,” Data for Tables 1, 2, and 10 (to July 2022), Industrial Production: Market, Industry Groups, and Individual Series, Historical Data: Tables 1, 2, and 10, Industrial Production and Capacity Utilization – G.17, Data, Board of Governors of the Federal Reserve System,https://www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt)

(What’s Left of) Our Economy: Are High Prices Starting to Cure Wholesale Inflation, Too?

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consumer inflation, consumer price index, consumer prices, core inflation, core PPI, cost of living, CPI, energy, energy prices, inflation, living standards, PPI, Producer Price Index, productivity, recession, wholesale inflation, wholesale prices, {What's Left of) Our Economy

In Wednesday’s post, I wrote that I was somewhat surprised about the new (and somewhat encouraging) official U.S. data for consumer inflation in July because June’s figures for what’s often called wholesale inflation were so bad. Because when the prices businesses charge each other to turn out the goods and services they sell, they typically compensate by passing these higher costs on to consumers.

But I actually shouldn’t have found those latest Consumer Price Index (CPI) numbers so unexpected. As I’ve pointed out before (e.g., here) such higher costs can be passed along only if consumers go along. So I should have recognized the better (but still far from good) CPI results as a sign that consumers are starting to balk – by cutting back their spending to some extent.

And significantly, yesterday’s official Producer Price Index (PPI) results for July suggest that businesses themselves began protesting higher prices and cutting back on purchases of their own inputs. That is, they may represent another example backing the adage that the best cure for high prices is high prices. 

In fact, in all the important ways, the new figures for both “headline” producer inflation and its “core” counterpart (which strips out energy and food prices supposedly because they’re volatile for reasons having little at best to do with the economy’s fundamental vulnerability to inflation) strongly resembled those for consumer inflation.

Both the headline and core PPI indices barely rose sequentially (reflecting a bit of “price rebellion,” and worsened on annual bases at a pace that was the slowest in many months, but still alarmingly high in absolute terms. Further, as with the CPI, the big reason for this improvement was the drop in energy prices. And both annual CPI and PPI rates remain worrisome because they’re coming off results for the previous year that were also historically torrid.

One prime indicator of how dramatically energy has affected these results comes from the month-to-month headline PPI numbers.

By this measure, producer prices sank by 0.50 percent (yes, “sank” – didn’t just “rise more slowly”) in July– the first such drop since April, 2020 (1.27 percent) when the first wave of the CCP Virus was wreaking its maximum damage on the economy. And this milestone followed a June monthly increase of 1.01 percent. The percentage-point swing between these two figures (1.51) was the greatest on record (though to be fair, this data series only goes back to late 2009).

The evidence for energy’s leading role? The July sequential fall-off of 8.96 percent (the first such decline since last December’s 1.42 percent and the biggest since since the 16.85 percent nosedive in peak pandemic-y April, 2020) came on the heels of June’s 9.41 percent increase – the biggest since June, 2020’s 9.99 percent, as the economy was recovering rapidly from that first virus wave, related lockdowns and other mandated restrictions, and voluntarily reduced activity. In addition, the percentage-point swing of 18.37 was the biggest since the 18.40 shift between the April, 2020 energy price crash and the May, 2020 rebound.

As for core producer prices, they crept up by just 0.15 percent on month in July. That’s the smallest such increase since last December’s 0.17 percent increase. And they displayed little volatility, as the 15 percentage-point difference between June’s rise of 0.32 percent and July’s was exactly the same as that between the June advance and May’s of 0.47 percent.

The annual PPIs tell a similar story of energy price dominance.

Headline producer inflation was up 9.69 percent on a year-on-year basis in July – the lowest such increase since last October’s 8.90 percent. And percentage-point difference between the July annual decrease and June’s of 11.25 percent (1.56) was the biggest since producer prices strengthened by 0.36 percent on an annual basis in March, 2020, as the virus arrived in the United States in force, and then weakened by 1.44 percent in April (a 1.76 percentage point difference).

And once again, energy prices were the big driver.

In July, they jumped 27.59 percent year-on-year. But even that blazing pace was dwarfed by June’s 53.54 percent annual surge – the biggest on record (again, going back only to late 2009), and well ahead of the previous all-time high of 47.71 percent in April, 2021 (a figure strongly bolstered by the baseline effect, since in peak pandemic-y April, 2020, annual energy prices crashed by 30.20 percent.

The percentage-point gap between the June and July results were the widest ever, too – 25.95. The previous record was the 24.56 percentage point difference between that record 47.71 percent annual spurt increase in April, 2020 and the previous month’s rise of a relatively modest 23.15 percent. 

Since it doesn’t include energy prices, annual core PPI’s ups and downs – like those of monthly wholesale inflation – have been pretty tame in comparison.

The July increase of 5.75 percent was the best such performance since June, 2021’s 5.60 percent. And the annual rate of increase has now slowed for four straight months.

July’s annual core PPI rise was also an impressive 0.82 percentage points less than the June figure of 6.38 ercent. But that gap was only the biggest since May, 2020’s 0.62 percentage-point difference over the April results.

This relatively gradual drop in core PPI on a yearly basis (which RealityChek regulars know is a more reliable gauge of the trends in the monthly numbers because the longer timespan measured smooths out inevitably random short-term fluctuations) is the most compelling evidence that headline producer and consumer prices will remain worrisomely high for the foreseeable future.

This scenario isn’t inevitable. Maybe Americans can count on energy prices continuing to decline month-to-month long enough to bring annual inflation rates down in absolute terms. And maybe even they don’t, high energy prices won’t start boosting prices throughout the rest of the economy. But those developments can only be reasonably expected if consumer and business spending weakens enough to produce sluggish overall economic growth and even a recession.

Such a downturn is probably the price the nation has to pay to extinguish inflationary fires. The big problem is that, without a serious focus on reversing the long and possibly worsening U.S. slump in productivity growth, other than relief from the current cost of living crisis, the public – and especially the poorest Americans – probably won’t receive any major and solidly grounded living standards payoff from such a victory.

(What’s Left of) Our Economy: America’s Long-Time Productivity Slump Looks Like it’s Deepening

Tags

CCP Virus, coronavirus, COVID 19, inflation, Labor Department, labor productivity, productivity, total factor productivity, wages, {What's Left of) Our Economy

Since strong productivity increases are America’s best hope for improving living standards, sustainable prosperity and robust non-inflationary economic growth, it’s clearly bad news that the nation may be on the edge of a productivity growth cliff – and staring into a canyon. That’s the clear message being sent by the new official U.S. preliminary data on labor productivity for the second quarter of this year released by the Labor Department this morning.

At least as bad: The lousy labor productivity figures strengthen the case that even though U.S. wages aren’t rising nearly as fast as living cost, they still could be fueling some of the torrid inflation of the last year and a half or so.

There’s a possibility that this dreadful performance is just another hangover from the CCP Virus pandemic and related lockdowns and curbs on individuals’ voluntary activity (along with the massive covid relief measures provided by Washington), which has played havoc with the entire economy and the data used to monitor its health. But it’s crucial to remember that the nation is also suffering a long-term productivity growth slump, so any virus distortions aren’t reflected in the numbers may not be game-changing.

As known by RealityChek regulars, labor productivity is the narrower of the two measures of efficiency tracked by Labor, and measures the output of each worker per each hour on the job. The Department itself made clear how awful the second quarter results were for the non-farm business sector – the numbers that are followed most closely:

“The 2.5-percent decline in labor productivity from the same quarter a year ago [actually, it was 2.55 percent] is the largest decline in this series, which begins in the first quarter of 1948.” (Actually, the Department’s own raw data tables go back to the first quarter of 1947.) Let’s all agree that a 75-year all-time worst is really alarming.

The quarterly figures were stomach-turning, too. Labor productivity sank at an annual rate of 4.71 percent sequentially – the fifth biggest such drop ever. Further, this followed on the heels of the first quarter’s sequential 7.64 percent nosedive – the second worst since the 12.26 percent crash of the third quarter of 1947.

And here’s some thoroughly depressing context: Such back-to-back quarterly declines are rare. Before that latest stretch, they – or longer labor productivity losing streaks – had only happened eleven times over the last three quarters of a century.

Two consecutive declines in labor productivity aren’t the longest such stretch on record. That dubious honor belongs to the five-quarter period between the second quarter of 1973 and the third quarter of 1974. But the latest cumulative quarterly deterioration of 12.26 percent at annual rates is the worst of all time. True, it’s just slightly greater than the 12.24 percent cumulative drop suffered during that 1973-74 productivity depression. But don’t forget – the current streak may not be over yet!

As for that 2.51 percent annual decline in labor productivity, the context here is completely gloomy, too. As with the sequential results, it represented the second straight worsening – following the 0.58 percent drop in the first quarter. And two or more straight annual labor productivity decreases have only happened six times before this morning’s release.

Also as with the quarter-to-quarter figures, a stretch of two straight decreases isn’t the longest ever. Between 1973 and 1974, annual productivity fell four consecutive times. But the current annual slump is the deepest since that which lasted between the first and third quarters of 1982. And of course, today’s slump isn’t over yet, either.

As I’ve written previously, productivity is the measure of economic performance in which most economists are least confident (especially in service industries that make up the vast bulk of the U.S. economy). Further, labor productivity is a narrower measure of efficiency than total factor productivity, which measures output as a function of a wide range of inputs used by business (not only workers but capital, technology, materials, etc.) And today’s second quarter results will be revised next month (which recently I mistakenly reported as the date for these preliminary numbers), with the latest set of (annual) revisions coming this fall.

But most legitimate doubts about the productivity data mainly concern their precision, not the direction they show. And all-time worsts and near-worsts surely can’t be mainly attributed to measurement flaws. And as for the total factor results, for decades, they’ve been no great shakes, either, as made clear in the above linked RealityChek post. Maybe the revisions will substantially brighten the picture?

So far, though, that’s just a “maybe.” The best information available indicates that America’s long-time productivity woes are taking a big turn for the worse, and that in combination with recent wage increases could be embedding unacceptably high inflation – and stagnating living standards – into the U.S. economy’s foreseeable future.

(What’s Left of) Our Economy: The Worst of All Possible Inflation Worlds for U.S. Workers?

Tags

ECI, Employment Cost Index, Federal Reserve, inflation, Jerome Powell, Labor Department, labor productivity, PCE, personal consumption expenditures index, productivity, recession, stagflation, wages, workers, {What's Left of) Our Economy

The newest report on a key official measure of worker compensation has just shown that, during today’s high inflation era, American workers could be both significantly fueling the soaring prices that are dominating the U.S. economy and getting shafted by them.

This measure – called the Employment Cost Index – is tracked by the Department of Labor, and is watched closely by the Federal Reserve (the government’s chief inflation-fighting agency) for two major reasons. First, it includes not just wages, but salaries and non-cash benefits. Second, unlike the Labor Department’s average wage figures, it takes into account what economists call compositional effects.

In other words, the those wage figures report hourly and weekly pay for specific sectors of the economy, but they don’t say anything about labor costs for businesses for the same jobs over time. The ECI tries to achieve this aim by factoring in the way that the makeup of employment between industries can change, and the way that the makeup of jobs within industries can change (e.g., from a majority of lower wage occupations to one of higher wage occupations).

In his press conference last Wednesday following the Federal Reserve’s announcement of a second straight big increase in the interest rate it controls directly, Chair Jerome Powell mentioned that the ECI report coming out on Friday would greatly influence the central banks’ decision on how much more tightening of credit conditions would be needed to slow the economy enough to cool inflation acceptably.

That’s because, as he has explained previously, the supposedly superior insights on worker pay provided by the ECI enable the Fed to figure out whether a major inflation engine has started to rev up – employee compensation rising faster than worker productivity. Industries (or entire economies) in this situation are denied the option of absorbing wage increases by achieving greater efficiencies in their operations Therefore, they face more pressure to maintain earnings and profits by passing pay increases onto their customers, their customers face more pressure to keep up with living costs by pushing for pay hikes themselves, and what economists term a classic and hard-to-break wage-price spiral takes off.

The new ECI results per se looked alarming enough from this perspective. They showed that between the second quarter of 2021 and the second quarter of 2022, total employee compensation for the private sector ose by 5.5 percent. That’s the fastest pace since this data series began in 2001. Moreover, this record represented the third straight all-time high. (RealityChek regulars know that private sector numbers are the most important gauge, since its pay and other indicators are mainly driven by market forces, unlike the statistics for government workers, where the indicators largely reflect politicians’ decisions.)

Sadly, though, according to the Fed’s favorite measure of consumer inflation (the Commerce Department’s Personal Consumption Expenditures price index), living costs increased by 6.45 percent. So workers fell further behind the eight ball.

Perhaps worst of all, however, productivity growth is in the toilet. We won’t get the initial second quarter figures until September 1, but during the first quarter, for non-farm businesses (the most closely followed measure for the private sector), it fell year-on-year by 0.6 percent – the worst such performance since the fourth quarter of 1993.

Nor was this figure a one-off for the current high inflation period. From the time consumer prices began their recent speed up (April, 2021) through the first quarter of this year, labor productivity is off by 1.36 percent, the ECI is up 3.95 percent, and PCE inflation has risen by 4.65 percent. So a strong case can be made that workers, businesses, and the economy as a whole are in the worst of all possible worlds.

Whenever productivity is the subject, it’s important to note that it’s the economic performance measure in which economists probably have the least confidence. And even if it’s accurate, don’t jump to blame workers for sloughing off. Maybe management is doing a lousy job of improving their productivity. Alternatively, maybe managers simply haven’t figured out how to do so in the midst of so many unusual challenges posed by the pandemic and its aftermath – chiefly the stop-go nature of the economy’s early aftermath, and the resulting turbulence that, along with the Ukraine war and China’s Zero Covid policy, is still roiling and stressing supply chains.

Whatever’s wrong, though, unless a course correction comes soon, it looks like the odds of the economy sinking into prolonged stagflation – roaring inflation and weak economic growth – are going up. And ultimately, that matters more to the American future than whether some form of recession is already here, or around the corner.