(What’s Left of) Our Economy: A Productivity Collapse in America’s “Industries of the Future”?

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advanced manufacturing, information technology hardware, Labor Department, manufacturing, multifactor productivity, productivity, {What's Left of) Our Economy

To the surprise of exactly no one who’s been following the issue lately, last week’s newest data from the federal government on productivity was literally brimming with bad news.

True, the figures only go up to 2016 – because the report covered multifactor productivity, the broader of the two measures tracked by the Labor Department. These figures take longer to calculate than the narrower productivity measure (labor productivity) because they examine many inputs other than simply hours worked. But the results were entirely consistent with the longstanding story that the U.S. economy’s efficiency keeps growing more and more slowly – that is, where it continues to grow at all.

In fact, America’s recent productivity performance has been so bad that observers could actually take some comfort in the headline finding that multifactor productivity improved between 2015 and 2016 in only 37 of the 86 manufacturing industries looked at in detail by Labor. That’s because this total was significantly higher than in 2014-15 – when multifactor productivity rose in only 21 of those sectors.

I could repeat previous exercises and list the industries with the best and worst latest annual multifactor productivity performances – which as usual, will be full of surprises for those expecting that the stars would be the nation’s technology-intensive “industries of the future.” But for now, let’s focus on what looks like an especially alarming development: Over the last roughly three decades, these crucial chunks of the economy have turned from multifactor productivity growth champs to multifactor productivity disaster areas. Over the same period, several other touted advanced manufacturing industries have also tumbled into the dumps multifactor productivity-wise from much less lofty perches.

The worst examples of literal collapse in multifactor productivity growth are in information technology hardware, and the most dramatic plunge has taken place in computers and computer peripheral equipment. Between 1987 and 2016, these sectors collectively have run away with the American economy’s multifactor productivity growth honors, with their efficiency advancing by this measure by 12.1 percent annually.

Since 2007, however (the year the Great Recession began), their average annual multifactor productivity growth rate has slumped to 1.2 percent, and between 2015 and 2016, it actually fell – by 2.6 percent.

Semiconductors and electronic components fared little better. Their 1987-2016 average annual multifactor productivity growth was 9.1 percent. But it’s fallen throughout the 2007-2016 period, and between 2015 and 2016 – when the current economic recovery was in its seventh year – it also dropped by 2.6 percent.

The ups and downs of multifactor productivity growth in communications equipment (including the gear used by the internet) have been more modest, but undeniably depressing all the same. Average annual growth between 1987 and 2016 was only 2.6 percent, but during the 1990s, it surged to nearly 5.5 percent. But since recession onset year 2007, multifactor productivity has decreased here as well, and declined by 1.6 percent between 2015 and 2016.

The aerospace industry, long America’s biggest net export winner, oddly has never registered robust multifactor productivity growth – at least not since 1987, when the data began to be collected. The average annual multifactor productivity growth rate for finished aircraft, missiles, and their parts? It’s actually -0.1 percent. The golden age (relatively speaking) of multifactor productivity growth for these companies came in between 2000 and 2007, when the average annual advance was 2.7 percent. But since 2007 it’s off slightly (dipping by an average 0.6 percent per year) and between 2015 and 2016 alone, plummeted by 6.7 percent.

Yet even these dismal figures look positively glowing when compared with those of the American pharmaceutical industry – widely viewed (like aerospace) as the global state of the art. From 1987 to 2016, multifactor productivity in this sector has decreased by an average of 2.3 percent every year. That’s by far the worst performance among the 86 industries tracked by the Labor Department. And since 2007, the rate of decline sped up to an annual average of 3.8 percent. Between 2015 and 2016, moreover, the drop-off gained even more momentum, reaching 4.8 percent.

Nor have other manufacturing sectors not typically classified as “technology intensive,” but nonetheless falling into the high value category, been immune from these woes. Here are the average annual multifactor productivity growth (and shrinkage) figures for key time periods for sectors both qualifying for this description, and known for strong exports:

 

agriculture, construction, and mining machinery

1987-2016: -0.2 percent

2007-2016: -2.5 percent

2015-2016: -8.6 percent (the year’s worst nosedive)

 

industrial machinery

1987-2016: 0.3 percent

2007-2016: -1.1 percent

2015-2016: -4.1 percent

 

turbines and power transmission equipment

1987-2016: 0 percent

2007-2016: 0.1 percent

2015-2016: -4.4 percent

It’s always possible that these multifactor productivity numbers have improved substantially over the last two years. But 30-year old trends rarely turn around completely, or even close, in such short time-spans. And multifactor productivity growth trends don’t turn around without the type of capital spending surge – among other developments – that the economy simply hasn’t seen yet. Until business begins spending considerably more, expect multifactor productivity in America to remain depressed – along with the nation’s odds of recreating sustainable prosperity.

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(What’s Left of) Our Economy: Manufacturing Labor Productivity Growth is Looking Like an Endangered Species

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Bureau of Labor Statistics, Federal Reserve, Jerome Powell, labor productivity, manufacturing, multi-factor productivity, non-farm business, productivity, recovery, {What's Left of) Our Economy

Federal Reserve Chair Jerome Powell stated yesterday that the U.S. economy is doing “very well.” Judging by the metrics that the central bank is supposed to focus on as a matter of law – inflation and the headline unemployment rate – that’s an eminently respectable claim. Based on another key measure of economic performance – labor productivity – it looks like whistling in the dark.

As known by RealityChek regulars, strong productivity growth is widely seen by economists as the best guarantor of sustainable future prosperity and rising living standards. And as also known, labor productivity is the narrower of the two such measures of economic activity tracked by the federal government.

But it’s the gauge that’s updated on the most timely basis, and the latest numbers – which came out last week – should be spurring alarm, not complacency.

These final (for now) results for the first quarter of this year both confirmed that output per person hour worked for the non-farm business sector (the broadest definition of the U.S. economy used in these studies) remains stuck in an historically slow-growth phase, and showed that labor productivity in manufacturing may be shifting into contraction.

The labor productivity performance of both these major sectors was revised down in the latest release from the Bureau of Labor Statistics (BLS). Rather than having grown by 0.70 percent on an annualized basis sequentially in the first quarter, labor productivity for non-farm businesses is now estimated to have advanced by only 0.40 percent. And in manufacturing, a 0.50 percent annualized increase is now judged to have been a 1.20 percent decrease. That’s its third such drop in the last five quarters.

A glass-half-full analysis would point out that the new non-farm business figure was better than that for the fourth quarter of last year (0.30 percent), and that the manufacturing fall-off followed a 4.20 percent fourth quarter jump.

But the new BLS report also presented manufacturing revisions going back to 2008, and they make clear that its labor productivity performance during this period has been far worse than even previously thought. (And it was already really bad.)

Let’s concentrate on how the new statistics have changed the picture for manufacturing labor productivity during the current recovery, and compare those results with those for previous recoveries – since such analyses yield the best, apples-to-apples, results.

Before the new data came out, manufacturing labor productivity during this expansion was reported to have grown by a total of 9.69 percent. That was less than a third of the rate achieved during the recovery of the early 2000s – which was also known as the Bubble Recovery that helped trigger the financial crisis and ensuing recession, and which last only six years versus. The current recovery is approaching its ninth anniversary.

And during the nearly ten-year long expansion that began in the early 1990s, manufacturing labor productivity surged even more strongly – by 45.86 percent.

The new manufacturing labor productivity growth number for the current expansion? Only 8.28 percent! That’s a downgrade of more than 14.50 percent!

Moreover, although the non-farm business labor productivity growth rate for the current recovery wasn’t revised down nearly as much – from 9.70 percent to 9.62 percent. But this figure, too, pales next to those of previous recoveries. During the bubble expansion, non-farm business labor productivity rose by a total of 16.03 percent. During the 1990s expansion, the rate was 23.25 percent.

By the way, don’t put too many hopes in the broader productivity measure – multi-factor productivity – to come to the rescue. Those numbers haven’t been much better.

Some productivity students have been arguing that it’s only a matter of time, and that recent technological advances will soon start super-charging productivity growth after a slow start just as they did in an earlier era of transformative technological change – the 1920s.

These optimists had better be right. Because if not, the only way to return American growth and living standards gains to their historic rates of improvements will be to flood the economy with credit in order to crank up spending. Feel free to scream if the date “2008” means anything to you.

(What’s Left of) Our Economy: Industries Claiming Labor Shortages are Productivity as Well as Wage Laggards

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compensation, Labor Department, labor productivity, labor shortages, productivity, restaurants, trucking, wages, {What's Left of) Our Economy

The labor shortage claims from American businesses keep filling the media (even though wages, which are supposed to rise sharply in such circumstances, are improving only sluggishly). So it was more than a little interesting to look over the latest statistics on labor productivity released by the Department of Labor.

After all, companies and industries really facing dire labor shortages, and unwilling or unable to raise wages, are supposed to boost their productivity (generally by introducing labor-saving devices and practices). But the new Labor Department numbers show that they’re doing surprisingly little on this front, either.

Let’s examine two sectors of the economy that say with special vigor that they’re running out of workers: trucking and restaurants.

According to a typical account (from yesterday’s Washington Post), American trucking companies are facing “an extraordinary labor shortage” and their CEOs (including industry veterans) are saying things like “I’ve never seen it like this, ever….It doesn’t matter what the load even pays. There are just not drivers.”

The sector does appear to be raising pay. But not until the last two years have its overall employment costs been rising faster than those for the private sector overall – and the latter’s increases have hardly impressed. These data cover the entire transportation and warehousing sector, but after shooting up from a 2.1 percent annual pre-inflation pace to four percent (between the fourth quarters of 2011 and 2012), total compensation advances slowed to 2.3 percent annually during the next two years, and then to 2.2 percent in 2015 before accelerating.

Moreover, trucking industry productivity growth hasn’t been world-beating, either. The Labor Department reported last week that its overall gain in labor productivity (the narrower of two productivity growth measures tracked by Labor, but the one whose data is more up to date) in 2017 was 0.8 percent. A comparable figure for services industries in general isn’t available, but the Department does track labor productivity for non-farm businesses and for manufacturing.

Since labor productivity productivity for the former increased by 1.3 percent in 2017 and only 0.4 percent in manufacturing, it seems safe to conclude that services sector labor productivity grew by more than 1.3 percent – and therefore much more than trucking’s 0.8 percent. Nor does this picture change much going back to 2013.

Further, a remarkably similar pattern emerges upon examining the restaurant business. Labor shortages are widely claimed and reported, along with examples of the industry starting to improve compensation practices. New technologies are also apparently being tried to improve efficiency in the sector. But according to the data, these responses to the purported shortage of workers have been belated at best.

For example, as with trucking, annual total compensation gains in the accommodation and food services sectors (no restaurant-specific numbers are available) trailed those for the overall private sector for several years until 2016. And their owners and lobbyists have been making labor shortage claims for at least that long.

Data for restaurants (and bars) specifically are available for their labor productivity, and their performance here is only roughly comparable to the dreary results for non-manufacturing non-farm businesses.

Industries like trucking and restaurants may indeed not be able to choose their employees from as many applicants as they would like, or from numbers to which they’ve become accustomed. But if they haven’t been doing anything special, at least until recently either to hike pay, improve productivity, or both, then several explanations are possible. Maybe they’re waiting for another wave of wage-depressing legal and illegal immigrants to save their days without the need to fatten paychecks of invest in new plant and equipment. Maybe they’re don’t know how to improve productivity in particular, in which case, their businesses simply may not be viable, or they’re simply lousy managers.

But unless the Labor Department figures are completely off-base, one explanation we can rule out completely is that, as groups, they’re utterly desperate for workers.

(What’s Left of) Our Economy: Trump Tariffs Will Devastate American Businesses? Seriously?

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China, Heritage Foundation, inputs, Investors Business Daily, manufacturing, Obama, productivity, profits, regulations, regulatory reform, tariffs, Tax Cuts and Job Act, Tax Foundation, taxes, Trump, {What's Left of) Our Economy

Since the Trump administration’s actual and potential tariffs became an issue,  opponents (including many American businesses) have complained loudly that these moves would ruin their global competitiveness by raising input costs. And in a supposedly devastating irony, they insist that these higher prices would offset much of the impact of the new tax cuts championed by the President.

If only looking broadly at recent changes in business costs justified such concerns. Or even came close. In fact, the big picture shows that domestic U.S. businesses – including steel users and companies that rely on parts and components from China in particular – have received benefits that will dwarf the costs created by tariffs. These higher costs, moreover, should be all the more acceptable given that a tariff-centered approach is the only response to longstanding predatory foreign economic practices like government-subsidized overcapacity and officially enabled intellectual property theft – whose gravity is now (finally) widely recognized – that hasn’t already failed.

To take one typical example, the Tax Foundation, a think tank that’s called the new Tax Cuts and Jobs Act “once-in-a-generation pro-growth tax reform,” thinks the following finding decimates the case against the proposed U.S. China tariffs: They’ll “offset more than a quarter of the tax cuts for 2018.” But by definition, for business, some three-quarters of the benefits of generational tax policy improvement will remain in place. (The exact share is unclear because the Tax Foundation includes consumer costs in its figure for overall tariff increase costs, but it’s no doubt roughly comparable.) In return, at least potentially, major threats to the global trading system will be eliminated or at least reduced significantly. This is an unacceptable trade-off?

And tax cuts are hardly the only major helping hand business has received from the Trump administration. According to one major supporter, the editorial page staff of Investor’s Business Daily (IBD), the regulatory cuts and changes accomplished so far by the President amount to a “Yuuuge” promise kept. Citing a (sympatico) Heritage Foundation study, the publication specified that the net gains for business far exceeded the alleged dollar amount of relief anticipated from the first phase of the new regulatory reform program – $645 million.

For the Trump accession to the White House meant that American companies would no longer be contending with an Obama administration that imposed $120 billion in regulatory costs on the nation’s economy each year, and wouldn’t need to worry about a Democratic successor presumably likely to continue down this road. That’s quite a turnaround.

And the true scale of the reversal is far greater still, for according to Heritage, “the impacts [of the Obama policies] have not been fully quantified for a significant number of rules, and…many of the worst effects — the loss of freedom and opportunity — are incalculable.” In sum, according to another analyst quoted by IBD, the Trump administration’s approach is “one of the most significant developments in regulatory policy in decades.”

Finally, it’s not as if U.S.-based businesses have been hurting financially lately. Corporate profits are near all-time highs as a share of the total economy. So are manufacturers’ profits.

And revealingly, American manufacturing’s productivity growth has been lousy lately, signaling that these firms have enormous potential to absorb the higher input costs generated by tariffs by achieving greater efficiencies.

Not that there may not be numerous convincing arguments against the Trump administration’s imposed and potential tariffs. But can American business, and its enablers in the nation’s chattering classes, at least stop pretending that devastating cost hits to their operations represent one of them?

(What’s Left of) Our Economy: America’s Productivity Blahs Continue

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bubble decade, Financial Crisis, Great Depression, labor productivity, manufacturing, multi-factor productivity, non-farm business, productivity, {What's Left of) Our Economy

Although productivity is widely seen by informed students of the U.S. economy as the biggest key to ensuring the nation’s prosperity over the longest run, the release of the government’s new figures on these measures of efficiency rarely generates many headlines. Last week was no exception, but as always, they’re worth considering in detail.

In this case, last Thursday’s new report on labor productivity – the most current but narrower of the two measures  — were most notable not for the preliminary estimate of the results for the first quarter of this year (which we’ll summarize below), but for revisions going back to 2013. And unfortunately, these resulted in little change to the feeble performance already reported in creating a unit of output per each person hour worked. Indeed, for manufacturing, the revisions amounted to a not-negligible downgrade.

Here are the two sets of figures for annual percentage gains in labor productivity between 2013 and 2017 for the non-farm business sector – the government’s main proxy for the entire American economy.

  Previous results                                                              Revised results

2013 +0.3 percent                                                               +0.3 percent

2014 +1.0 percent                                                               +1.0 percent

2015 +1.3 percent                                                               +1.2 percent

2016  -0.1 percent                                                                          0

2017 +1.2 percent                                                                +1.3 percent

Like I said, no important differences here. In fact, on net, the revisions brighten the picture marginally. Not so for manufacturing:

  Previous results                                                                Revised results

2013 +0.9 percent                                                                 +0.9 percent

2014    0                                                                                        0

2015 +0.2 percent                                                                 +0.3 percent

2016 +0.4 percent                                                                 -0.4 percent

2017 +0.7 percent                                                                +0.4 percent 

Here we see a marked weakening, especially for the last two years. And the extent of manufacturing’s lousy record is even clearer from comparisons among the current economic recovery and its two predecessors.

non-farm business                                                                  manufacturing

90s expansion: (2Q 1991 to 1Q 2001) +23.25 percent          +45.86 percent

bubble expansion (4Q 2001 to 4Q 2007) +16.03 percent      +30.23 percent

current expansion: (2Q 2009 to present)  +9.70 percent          +9.69 percent

Not only has labor productivity growth slowed much more dramatically in manufacturing than in the rest of the economy between the expansion of the 2000s – which of course ended in the worst national and global financial crisis since the Great Depression — and the current expansion. Manufacturing labor productivity actually has been growing more slowly in absolute terms during this recovery than non-farm business labor productivity. And it’s not as if non-farm business labor productivity has been killing it.

Those preliminary results for the first quarter of this year extend this narrative. On a quarter-to-quarter basis, both non-farm business labor productivity and manufacturing labor productivity increased – by 0.7 percent and 0.5 percent at an annual rate, respectively. But the revisions revealed a major slowdown in manufacturing labor productivity growth on a quarterly basis (from a downwardly revised — and kind of fishy — 4.5 percent on an annual basis) and a slight pickup in non-farm business productivity growth (from no growth at all at the end of last year).

The latest results for the broader measure of productivity growth – multi-factor productivity, which includes a range of inputs broader than just worker hours – showed a small uptick, too. So even though they’re not as current as the labor numbers, maybe we’re seeing the beginnings of lasting improvement in productivity growth generally speaking. But as the recovery-to-recovery data still make clear, the United States still has a long way to go before it genuinely shakes off its productivity blahs.

(What’s Left of) Our Economy: Beware the Fear-Mongering on the Trump Tariffs

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Bloomberg, border adjustment tax, China, inflation, manufacturing, metals, overcapacity, productivity, real value-added, steel, tariffs, trade law, Trump, U.S. Business and Industry Council, value-added taxes, {What's Left of) Our Economy

Well, there can’t be any doubt about it now. President Trump’s trade policy course changes – and especially his determination hike U.S. tariffs – are already harming American manufacturers and the broader economy. After all, this Bloomberg News post just told us so. Except if you examine it carefully, and add a little common sense info, there’s no reason to believe any of these claims – especially for the manufacturing sector.

According to this Bloomberg report, “Confidence gauges spanning small businesses, factories and the public at large are coming off the boil as U.S. tariffs on imported metals — along with threats and counterthreats over Chinese goods — roil the stock market and cast a cloud over what was otherwise a bright economic outlook.”

Manufacturers reportedly face especially serious threats:

“The Philadelphia Fed’s index of business activity six months from now dropped 7.2 points to 40.7 in April, the lowest level since July. Earlier this week, a similar report from the New York Fed showed its future business conditions index registered the steepest one-month drop since the Sept. 11 terrorist attacks. Meantime, factories in both regions are reporting rising prices.”

And Bloomberg conveniently provided a chart displaying these reported “rising costs amid tariffs on imported metals.”

But the chart, and related macroeconomic data, actually represent compelling evidence that metals prices so far have had no discernible impact on U.S. manufacturing’s fortunes. Consider the following:

As the chart shows, the prices paid by inputs for factories in the Northeast sank significantly between 2014 and 2015. Steel prices fell especially sharply (largely because the Chinese government was fueling a massive global glut in this metal).

And according to official U.S. data, how did American domestic manufacturing fare? It grew in real value-added terms ( a measure of output preferred by many economists) by all of 0.90 percent.

The following year, according to the chart, prices these factories reported paying stayed very low, but began rising. Steel prices rebounded significantly, too. Manufacturing’s real value-added growth that year? About half the 2014-15 rate – 0.47 percent.

Those factory prices rose even faster the following year, and steel prices kept increasing. But the impact on America’s domestic manufacturing wasn’t exactly catastrophic. In fact, its annual real value-added growth nearly quadrupled – to 1.89 percent.

How on earth could this be? How about this as a starting point for an answer? Prices of steel or any other inputs aren’t the only influences on business performance. And they’re probably not the most important. For example, demand (aka “customers”) matter, too. In the United States, when those metals prices were dropping sharply between 2014 and 2015, price-adjusted economic growth turned in a solid 2.90 percent growth. The following year, when metals prices stayed unusually low, the real economic growth rate halved. And guess what also nearly halved? Manufacturing’s real value-added increase.

Even more interesting – between 2016 and 2017, when metals prices kept bouncing back, manufacturing’s real value-added jumped. Maybe in part because the economy’s overall growth rate increased by more than 50 percent, to 2.30 percent?

Looking at global growth (i.e., including foreign customers) yields similar conclusions. During that 2014-15 year of greatly reduced metals prices, pretty good U.S. growth but lousy manufacturing growth, the International Monetary Fund tells us that the global economy expanded by (a pretty poor) 3.10 percent. Chances are that feeble growth didn’t help America’s manufacturers, many of whom make much of their money by exporting.

Global growth only picked up to 3.20 percent the following year, but America’s growth tanked. The latter, then, seems to have mattered more to domestic manufacturers, as their own expansion rate fell by 50 percent. Between 2016 and 2017, however, when both the U.S. expansion and the global expansion sped up (the latter to 3.80 percent), American  manufacturing’s growth experienced that impressive takeoff. 

Now it’s true that the Trump metals tariffs could inflict greater harm on U.S. domestic manufacturers going forward, as they could impose on metals-users new costs that come on top of whatever global prices they need to pay at a given moment.  Nonetheless, it’s not like industry is exactly helpless to respond. For instance, it could start improving its productivity performance – which has been lousy on balance during this economic recovery. More productive sectors and companies of course can pass on input price increases without charging their customers more – and thereby undercutting their competitiveness.

At the same time, the metal-users’ loud complaints about the Trump tariffs point to a longstanding weakness of U.S. trade policy and especially the related body of trade law that the President has needed to rely on so far because the chief executive’s unilateral tariff-imposing authority is so limited. Because the trade law system, like U.S.-style legal systems generally, springs into action only when a specific complaint from private business is filed, its remedies are confined to that industry’s predicament. Not even the few trade cases initiated by the Obama administration or even the Trump administration have changed this pattern. (The sweeping tariffs on China sought in the President’s Section 301 intellectual property-centered action have come closest.) The tendency of such narrow-bore measures to enable foreign trade rivals to respond with divide-and-conquer tactics shows that two improvements should be made.

First, as proposed by my previous organization, the U.S. Business and Industry Council, industry-specific tariffs approved by the trade law system should be accompanied by similar protection for the “downstream” (i.e., user) industries. As a result, they would be much less likely to be victimized in the American market, anyway, by foreign competitors not saddled with higher input prices. 

Second, and even better, the administration should revive the Border Adjustment Tax that was part of the tax reform plan initially introduced by the House of Representatives’ Republican leaders. This measure, which would have worked much like the foreign Value-Added Taxes (VATs) used by most trading economies, would not only have provided the equivalent of protective tariffs for all U.S. goods and services facing import competition.  It would have boosted the competitiveness of all American exports in all foreign markets by providing the equivalent of a subsidy.   

Although President Trump initially (and weirdly) was cool to the Border Adjustment Tax, reportedly more recently he’s been changing his tune. Adopting this plan in particular could solve most of the economic as well as the political problems currently threatening his trade policies. 

 

(What’s Left of) Our Economy: Puzzling New Glimpses into U.S. Manufacturing

Tags

Bureau of Economic Analysis, Bureau of Labor Statistics, Commerce Department, durable goods, Labor Department, labor productivity, manufacturing, non-durable goods, productivity, real value-added, {What's Left of) Our Economy

Two important sets of economic statistics came out today that shed lots of new light on the health of American manufacturing. Unfortunately, little of it is especially encouraging. In fact, some of it’s pretty mystifying.

The Commerce Department’s Bureau of Economic Analysis issued its annual report on the growth rates of different sectors of the U.S. economy. The main manufacturing finding: Industry’s annual growth rate did pick up last year according to a measure called real value-added (which leads off the report, and which attempts to eliminate the double-counting of output that occurs when broader gauges fail to distinguish between final products on the one hand, and their parts, components, and other inputs on the other). Yet the acceleration from a 0.5 percent yearly expansion in 2016 to 2017’s 1.9 percent trailed that output increase of the economy as a whole – which improved from 1.5 percent to 2.3 percent. As a result, the economy became slightly more manufacturing light in 2017.

In addition, within manufacturing, growth leadership shifted dramatically. Whereas the non-durable goods super-sector outperformed its larger durable goods counterpart in 2016 (with the former’s real value-added improving year-on-year by 1.2 percent while the latter’s slipped by 0.2 percent), durable goods rebounded to a 3.4 percent annual growth rate in 2017 while non-durables’ real value-added inched up by just 0.1 percent.

The American economy’s overall growth leader in 2017 in real value-added terms? The mining sector, which jumped by 8.5 percent after plummeting by 13.3 percent the year before. The next fastest-growing industries were administrative and waste management services (4.9 percent), corporate management (4.6 percent), and information services (four percent even).

Today’s second data set (from the Labor Department’s Bureau of Labor Statistics) shows which sectors within manufacturing last year excelled in terms of labor productivity (the narrower of economists’ two main measures of efficiency), and which lagged and, once more, many of the results were surprising. (We already know that industry in toto had a dreary labor productivity year last year.) For instance, computer and computer peripheral equipment led the way last year, generating eleven percent more output per employees hour worked. But next came apparel knitting mills, at 10.5 percent, followed by agriculture, construction, and mining machinery at 10.4 percent, and cutlery and handtools at 9.4 percent.

The biggest productivity loser in 2017? Miscellaneous transportation equipment, where it nosedived by 11.5 percent. In ascending order, the next worst performers were electric lighting equipment (down 9.2 percent), sugar and confectionary products (down eight percent), and beverages (down 7.8 percent).

Other manufacturing sectors whose labor productivity worsened on year in 2017? Pharmaceuticals and medicine (down seven percent), metal-working machinery (which includes machine tools – and where labor productivity declined by 1.3 percent), communications equipment (down 2.2 percent), semiconductors (down 0.7 percent), motor vehicles (down 4.1 percent), and aerospace products and parts (down 3.1 percent).

And if you’re thinking that this list of productivity losers includes lots of so-called industries of the future, you’re of course right. Kudos also if you’ve noted that aerospace is the economy’s biggest trade surplus industry. It’s enough to instill a little humility in those of us who think we’re getting a handle on this gargantuan, complex American economy, or heighten for those who had some already.

(What’s Left of) Our Economy: U.S. Productivity Growth Remains Far from Great Again

Tags

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

The U.S. government’s latest figures on the broadest measure of the economy’s productivity growth came out this morning, creating the perfect opportunity to report on these key data along with a narrower set of productivity growth numbers released two weeks ago. The latter generally are timelier (though not this time), and the latest edition revises these numbers going all the way back to 1990!

The big takeaway: Despite some very modest upgrades for the most recent results, the economy remains in the midst of a major productivity slowdown. This matters greatly, because even though many economists doubt how accurately the government statistics measure productivity growth, nearly all economists agree that strong performances in this field are crucial to boosting Americans’ living standards in a sustainable way.

First, the broader measure – known as multi-factor productivity because it measures the nation’s prowess at using a wide range of inputs to generate a unit of output of a certain good or service. For non-farm businesses (the headline figure used by the productivity-tracking Bureau of Labor Statistics to capture the economy as a whole), the BLS calculates that multi-factor productivity improved by 0.9 percent between 2016 and 2017. That’s reasonably good news, since it’s the best such rate of growth since 2013-14’s one percent.

Revisions for 2014-15 and 2015-15, moreover, were only slightly negative in toto.

Yet in historical perspective, this performance remains pretty miserable. Comparing multi-factor productivity growth during the last three economic recoveries (to obtain the best apples-to-apples data), shows the following:

Non-farm business multi-factor productivity grew by 9.75 percent during the 1990s expansion (which lasted roughly nine years). It grew by 7.29 percent during the early 2000s bubble recovery (so called because its dependence on borrowing and spending wound up triggering the national and global financial crises). Since that expansion lasted about six years, it’s annual multi-factor productivity growth was actually a little better.

But the current economic recovery began in the middle of 2009. Yet through the end of 2017, multi-factor productivity for non-farm businesses increased by only 6.84 percent. So the pace of growth has slowed considerably.

The labor productivity figures tell us about economic efficiency stemming from the use of just one input – an hour’s worth of work by a single worker. But they’re usually more up to date since they come out on a quarterly, not annual, basis. And these more frequent reports also contain more detailed breakdowns, which is especially interesting for me because they make possible gauging manufacturing’s performance.

For that non-farm business sector, BLS now tells us that last year’s fourth quarter labor productivity stayed unchanged sequentially on an annual basis – hardly good, to be sure, but better than the 0.1 percent dip previously reported. That upgrade, plus a third quarter growth rate that’s now 2.7 percent rather than the previous 2.6 percent number, helped bring the full-year 2017 advance to 1.1 percent. That’s the best annual performance since 2013-14’s 1.5 percent.

Unfortunately, as indicated above, these results incorporate long-term revisions, and these actually worsen the non-farm labor productivity story. Again, examining the trend over the last three economic recoveries, we find that cumulative labor productivity growth remained the same for the 1990s and bubble-decade expansions – 23.25 percent and 16.03 percent, respectively. But the figure for the longish current recovery was cut from 9.34 percent growth to 9.32 percent.

Manufacturing’s labor productivity growth patterns look quite similar. The fourth quarter sequential advance was revised up from an excellent 5.7 percent annualized to six percent. And the third quarter’s dismal 4.9 percent annualized drop was upgraded to a 4.7 percent decrease.

Longer term, moreover, the slowdown story here remained intact, too. As with non-farm business labor productivity, manufacturing labor productivity’s cumulative growth during the 1990s recovery and the bubble decade recovery were unrevised by the BLS. So they’re still 45.91 percent and 30.08 percent (much higher in absolute terms, you’ll note, than the growth for non-farm businesses overall). But the 10.91 percent manufacturing labor productivity growth increase for the current recovery was revised down to 10.90 percent. And yes, its performance between the last two economic recoveries deteriorated at a much faster rate than that of non-farm business labor productivity.

It’s still true, as indicated above, that lots of uncertainty still surrounds all these productivity data. But it’s also still true that most of the economists who argue about their accuracy agree that the current recovery’s overall growth has been historically feeble. Significantly slowing productivity growth is entirely consistent with this weakness.

(What’s Left of) Our Economy: For America’s Steel-Makers, No Good Deed Goes Unpunished

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aluminum, American Economic Review, durable goods, inflation-adjusted output, Jobs, manufacturing, Michael Mandel, multifactor productivity, productivity, steel, tariffs, The Economist, Trade, Trump, {What's Left of) Our Economy

One of the strangest aspects of the debate over the new Trump tariffs is the way analysts and reporters and pundits are now handling the issue of productivity in the American steel industry, which along with aluminum will receive the benefit of these levies.

Usually, industries like steel that win trade protection are described as economic losers – they supposedly need this government crutch because they’ve grown fat and lazy, or technologically obsolete, and as a result have lost whatever ability they’ve had to meet the challenge of global competition. Here’s a typical allegation along these lines made in 2002 by the globalization and free trade cheering Economist magazine – when President George W. Bush imposed tariffs on U.S. steel imports. The charge has been echoed much more recently by economist Michael Mandel.

Nowadays, though, tariff opponents have come up with a new twist: American steel-makers in particular don’t need protection precisely because they’ve become highly competitive. According to this perspective, the steel protectionists inside the outside the White House are overlooking how the major steel job losses they’re obsessing about have resulted overwhelmingly not from predatory foreign competition, but because steel companies have become so efficient that they can produce much more of the metal with a much smaller workforce.

There’s no doubt that the U.S. steel industry has dramatically boosted its competitiveness by introducing new technology and other forms of knowhow into its factories. The authors of the above Economist editorial clearly didn’t know about findings, published in the prestigious American Economic Review, that over the roughly 30 years preceding their leader, the sector’s “output per worker grew by a factor of five, while total factor productivity (TFP) increased by 38 percent. This [made] the steel sector one of the fastest growing of the manufacturing industries over the last three decades, behind only the computer software and equipment industries.”

Moreover, because virtually no American steel firms supply the domestic market with offshored production, virtually none of the labor productivity increase cited above has stemmed from the misleading upward bias to recorded labor productivity figures created by this practice.

But 2002 was then. What about now? Is Mandel right about steel as a latter day productivity growth laggard? Not according to data from the U.S. Bureau of Labor Statistics, which compiles and publishes the productivity data for the government. Its figures show that the American primary metals sector, which includes steel and aluminum, increased its multi-factor productivity by 5.52 percent between 2008 (when the last recession took hold) and 2015 (the latest figures).

Manufacturing overall, by comparison, saw its productivity actually worsen by this measure – considered the most accurate gauge of an admittedly elusive performance indicator – by five percent during this period. Moreover, durable goods manufacturing – the industrial super-sector containing primary metals – saw its multi-factor productivity shrink by 1.28 percent between 2008 and 2015.

So The Economist and Mandel plainly have given steel a wholly unjustified bad productivity rap. But does that mean that those who have recognized steel’s outstanding recent productivity growth are right to argue that the resulting job loss in no way warrants tariffs? Not exactly.

For even though steel and other primary metals have been productivity growth leaders, they’ve been laggards not only in job creation, but in output. Indeed, during that 2008-15 period, primary metals’ inflation-adjusted production sank by more than three times faster (15.98 percent) as overall manufacturing output (5.22 percent). The output gap was even wider between steel and durable goods in toto (-1.28 percent).

A highly productive industry facing a vast import tide that’s been shrinking in constant dollar terms doesn’t prove definitively that trade is central to steel’s problems. But it’s awfully suggestive – indicating in the process that, despite its good productivity deed, the U.S. steel industry is nonetheless being punished.

(What’s Left of) Our Economy: U.S. Labor Productivity Resumes Falling

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

So much for the overall American labor productivity revival (which wasn’t much of a revival). At least so far.

The newest (preliminary) figures for the fourth quarter of last year are just in, and they show that the headline figure (for non-farm businesses) fell sequentially by 0.11 percent on an annual basis. The dip was the first since the first quarter of 2016. Moreover, the third quarter surge that was originally reported at 2.95 percent annualized (the best sequential result since the 4.34 percent of the third quarter of 2014) was revised down to 2.72 percent.

(As RealityChek regulars know, labor productivity is the narrower of the two measures of economic efficiency tracked by the Labor Department and most other national economies. Multi-factor, or total factor, productivity, looks at output as a function of a much wider range of inputs than simply person hours worked, but the data come out on a much less timely basis.)

These results were partly offset by a startling turnaround in manufacturing’s labor productivity. The preliminary fourth quarter, 2017 annualized increase is pegged at a stunning 5.56 percent. If that figure (or close to it) holds, that would be industry’s best such performance since the 6.82 jump in the second quarter of 2010 (early during the current recovery, when productivity tends to bounce back, along with the rest of the economy). The final third quarter result was a 4.77 percent plunge.

Still, the continuing crisis in American labor productivity is made (loud and) clear by comparing the economy’s performance across recent economic expansions (to get the apples-to-apples figures). During the 1990s recovery, which lasted just under ten years, non-farm business labor productivity increased by 23.25 percent. During the 2000s “bubble decade” expansion, which lasted six years, the rise was 16.03 percent – indicating a slight slowing of the growth rate. But during the current recovery, which was eight and one half years old at the end of 2017, labor productivity has been up only 9.34 percent. That is, its growth rate has been much slower – and barely flat cumulatively.

Manufacturing’s labor productivity growth slowdown has even more dramatic – especially lately. During the 1990s expansion, it shot up by 45.91 percent. The growth rate plummeted to 30.08 percent during the shorter recovery of the 2000s decade, and then all the way down to 10.91 percent through the first eight and one half years of the current recovery. In other words, manufacturing’s labor productivity growth since the expansion began has been minimal, too.

The productivity data are among the figures in which economists have the least confidence, and it remains entirely possible that, according to one major critique, they’re missing most of the progress enabled by new technologies whose impact is excruciatingly difficult to measure. (Here’s a report spotlighting a typical version of this argument.) At the same time, these figures – especially for the current expansion – track with reports showing weak capital spending, generally seen as a prime source of productivity growth. And when it comes to manufacturing, the Labor Department’s methodology still considers jobs offshoring as a development that boosts labor productivity – even though the total number of workers worldwide doesn’t change, and therefore the sector’s total efficiency doesn’t, either.

So the challenge remains for American leaders to grow the economy in the healthy way, by relying on increasingly productive workers and businesses and industries. Or it can continue the easy money route chosen since the financial crisis, and hope that, for some unspecified reason, the results will be different this time.