(What’s Left of) Our Economy: Pssst! Some Good News on Productivity!

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

Here’s a peculiar new twist in ongoing media coverage and more general establishment commentary on the U.S. economy: The conventional wisdom among both these intertwined crowds holds that the American trade deficit doesn’t matter much economically. Yet the apparently poor trade numbers reported yesterday by the Census Bureau was the talk of these towns.

The conventional wisdom held by the establishmentarians also holds that productivity is incredibly important. Indeed, it’s widely described as a key to future prosperity. But the improving productivity figures released today by the Labor Department were virtually ignored.

Of course, a moment’s reflection reveals why. President Trump has made a very big deal out of the need to reduce the trade deficit, and the newest data indicate he’s failing. (Special note: You’ll be hearing more from me on this score very soon.) But Mr. Trump has said nothing about productivity. (That’s actually typical for politicians.) So even had the statistics been poor, there would have been no opportunity for a mass “Gotcha!” festival.

These latest numbers concern labor productivity which, as known by RealityChek regulars, is the narrowest of two productivity measures tracked by the Labor Department. But they’re also published in a much more timely fashion than the total factor (also called multi-factor) productivity statistics, which as their name implies, require collecting more information in order to calculate.

The improvement is most apparent upon examining recent annual changes in labor productivity (which tells us how many units of output a single person working for a single hour can turn out). The new figures bring the story up to the end of 2018, and show a year-to-year gain in the fourth quarter of 1.90 percent for non-farm businesses – the Labor Department’s American economic universe when it comes to productivity.

That increase may not sound like much, but it’s the biggest such advance since the first quarter of 2015 (1.60 percent), and the second biggest since the third quarter of 2010 (2.70 percent). And the trend has been upward since the second half of 2015.

Manufacturing’s labor productivity performance wasn’t quite so good. For the fourth quarter of 2018, it rose at a 1.00 percent annual rate. That increase represented a slowdown from the third quarter’s 1.50 percent. But even though industry’s productivity has been climbing only sluggishly in general since the beginning of 2016, that’s represented a major and positive change from the end of 2014 through 2015 – when manufacturing labor productivity fell on-year for five straight quarters.

Nonetheless, no one should assume that all’s well with labor productivity in America, either for non-farm businesses or for manufacturers. In fact, as the table below makes clear, the nation remains smack in the middle of a deep long-term labor productivity slump in relative terms. Specifically, over the last three economic expansions (the best way to measure trends over time, since it compares like stages of the business cycle), labor productivity gains for the non-farm business and manufacturing sectors have drifted steadily downward.

Especially discouraging: Although the current economic recovery is now just about as long as its 1990s predecessor, the cumulative non-farm business productivity rise for this expansion is less than half as strong. As for manufacturing, its labor productivity performance has been so weak (increasing by just over a fifth the rate of the 1990s expansion), that it’s lost its long-time productivity improvement lead.

When productivity improves strongly, all sorts of good things follow. In particular, workers’ wages can rise robustly without triggering inflation – which in an economy dominated by consumption, can help set the stage for equally vigorous, non-inflationary growth, and therefore more wealth for everyone to share. Does that sound boring to you? I’m shaking my head “No,” as well, which is why whether they keep getting overlooked or not, I’ll keep following the productivity news closely.

                                                                   Non-farm business          Manufacturing

1990s expansion (2Q 1991-1Q 2001)           +23.74 percent            +45.86 percent

bubble expansion (4Q 2001-4Q 2007)          +16.59 percent            +30.23 percent

current expansion: (2Q 2009 to present):      +11.28 percent              +9.70 percent

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Following Up: Lousy U.S. Auto-Making Productivity and Those GM Layoffs

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automotive, Bureau of Labor Statistics, Detroit automakers, General Motors, GM, Jobs, layoffs, motor vehicles, NAFTA, North American Free Trade Agreement, offshoring, productivity, total factor productivity, Trade, Trump, yoFollowing Up

Yesterday, I posted some data – with a special focus on major victim state Ohio and major victim region Youngstown – providing some badly needed perspective on General Motors newly announced manufacturing jobs layoffs in the United States (along with Canada and other unspecified locations). Today I’d like to follow up with some statistics that shed more light on GM’s decision – and the strengths and weaknesses of the American domestic automobile industry.

There’s no doubt that, as widely noted, many trends and developments are responsible for the new job cuts – which are highly unlikely to be restricted to GM alone. Some of the biggest include changing product mixes (away from smaller vehicles and toward larger vehicles), new technologies (for electric vehicles and self-driving vehicles), and the inevitable waning of the latest “automotive cycle” – that is, a slowdown in auto sales that has been entirely predictable following the sector’s strong recovery from a terrifying downturn during the last recession.

But one industry trend that’s been sorely neglected – and that surely bears heavily on the “Detroit 3” auto companies’ failure to continue producing smaller vehicles profitably at their domestic factories (the plants targeted for closure) – concerns its productivity performance. In a word, it’s been lousy – which supports last week’s post presenting evidence that U.S. metals-using industries like automotive have been using crutches like (foreign government-subsidized and therefore artificially) cheap raw materials, along with massive job and production offshoring, to juice their profits rather than efficiency-enhancing improvements resulting from creating new technologies, investing in new machinery, devising better management techniques, or some combination of these measures.

That post last week featured data showing that the American transportation equipment sector (which of course includes auto manufacturing) has performed relatively well during the current U.S. economic recovery and the previous expansion – though the rate of growth decelerated over that time span. These periods were examined because they were marked by a tremendous increase in American imports of steel over-produced and dumped into the United States by foreign producers, which pushed steel prices way down for reasons having nothing to do with free trade or free markets.

But more detailed statistics make clear that the automotive sector per se lately has fared worse when it comes to total factor productivity – the broadest of two measures of productivity tracked by the Bureau of Labor Statistics, and the productivity measure I examined last week.

During the 2001-2007 American expansion, total factor productivity in the motor vehicles sector actually grew faster than that for transportation equipment overall – 22.70 percent versus 13.38 percent. But from the 2009 start of the current recovery through 2016 (the latest available data), vehicle makers’ total factor productivity advanced by only 2.53 percent – that is, much more slowly than the 9.67 percent improvement registered by transportation equipment overall.

In fact, since achieving a huge (15 percent) snapback in total factor productivity during the recovery’s first year following a deep (12.29 percent) nosedive during the recession, vehicle-makers’ total factor productivity fell by 10.94 percent through 2016. As a result, its total factor productivity hasn’t improved on net since 1989.

Also interesting: Since the U.S. ratification of the North American Free Trade Agreement (NAFTA) in 1993 created a bright green light for automotive production and job offshoring, total factor productivity in American motor vehicle-making is up by only 9.20 percent. That’s a considerably slower rate of progress than for manufacturing overall (20.13 percent), even though automotive trade has figured so heavily in U.S. trade flows with fellow NAFTA signatories Mexico and Canada so far.

I don’t mean to minimize the challenges all automotive manufacturers face given the multi-dimensional crossroads that seems to be arriving rapidly for the sector. What should be glaringly obvious, though, is that they’re unlikely to be met adequately – including producing smaller vehicles profitably, especially if and when oil prices start rising again – with a productivity performance that barely qualifies as second-rate.    

(What’s Left of) Our Economy: Productivity-Challenged U.S. Manufacturers Want Their Cheap Foreign Metals Crutch Back

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aluminum, Canada, China, consumer prices, inflation, manufacturing, metals tariffs, Mexico, overcapacity, producer prices, productivity, quotas, steel, tariffs, total factor productivity, Trade, Trump, {What's Left of) Our Economy

Anyone genuinely concerned with the long-term health of the American economy and its manufacturing sector in particular should be thankful for the letter sent Monday to the Trump administration by 33 business organizations asking for removal of the tariffs imposed earlier this year on steel and aluminum imports from Mexico and Canada.

For the letter – signed by groups from many sectors of the economy but principally by manufacturing organizations – unwittingly reveals the extent to which American industry has become addicted to supplies of metals whose prices have been artificially cheapened mainly by a global glut still primarily fed by subsidized over-supply from China. As a result, the letter also suggests a reason why American manufacturing productivity growth has been so lousy lately – in the process undermining the economy’s ability to generate lasting, as opposed to bubbly, prosperity.

To begin with, however, the signers’ leading claim is demonstrably, and whoppingly, false. They contend that the metals tariffs have caused significant harm to American manufacturers, consumers and workers. They have raised costs significantly for a wide array of industries….” Yet as I have repeatedly shown, (most recently here) since the levies began to be imposed, at the end of March, nothing in the official data on domestic manufacturing’s performance points to any harm whatever. In fact, in most respects, recent months have actually seen out-performance by metals-using industries – which logically should be where the greatest problems stemming from metals tariffs are concentrated.

Especially false is the insistence that because “Many manufacturing industries rely on imported inputs to produce goods competitively in the United States,” the tariffs “raise the costs of manufacturing in the U.S. and place our manufacturers at a competitive disadvantage with respect to finished products which are made outside of the U.S. and imported without being affected by the tariffs.  Further, consumers are starting to feel the pinch of higher prices across the board, as evidenced by recent increases in the CPI [Consumer Price Index].”

Indeed, this contention has been borne out neither by the consumer price numbers nor the producer price statistics.

But an examination of steel import figures and productivity performance suggests the real motive of the manufacturing signers in particular: They hope to resume relying on cheap foreign government-subsidized foreign metals for their growth and profits, rather than the kinds of productivity improvements that will do the most to strengthen both their bottom lines and the entire economy’s foundations over any significant time span.

The evidence comes from comparing total U.S. steel imports on the one hand, and total factor productivity (the broadest of the two main measures of efficiency tracked by the Labor Department) for the main metals-using industries on the other, during the previous and current American economic recoveries (the best way to generate apples-to-apples results).

That previous recovery officially lasted from late 2001 to late 2007, and through 2006, measured by quantity, steel imports increased by nearly 28 percent – largely fueled by a purchases from China that jumped more than 260 percent. (As the impact of the housing bubble’s bursting spread throughout the economy, steel imports from China and the rest of the world fell sharply before the recession’s official onset in the fourth quarter of 2007.)

And here are the total factor productivity increases for that 2001-2006 period for the American private sector for a whole, manufacturing overall, the metals industries themselves, and the key metals-using sectors:

private sector:                                      +9.19 percent

manufacturing:                                  +13.55 percent

durable goods manufacturing:          +19.44 percent

primary metals:                                   +5.72 percent

fabricated metals products:                 +6.35 percent

non-electrical machinery:                  +11.01 percent

transportation equipment:                 +13.38 percent

The figures for the current recovery look markedly different. Let’s examine the results from its 2009 start through 2016 (the year for the latest available detailed total factor productivity statistics). During that period, total national steel imports soared by just under 104 percent by quantity. Purchases from China sank like a stone (by more than 63 percent) between 2015 and 2016, because of China-specific anti-dumping tariffs. But clearly many other countries and their subsidized steel sectors picked up the slack, because total U.S. imports dropped off by only 17.31 percent. And continuing Chinese over-production kept exerting downward pressures on prices worldwide.

And how did total factor productivity fare during that big steel import run-up?

private sector:                                      +5.93 percent

manufacturing:                                     -4.48 percent

durable goods manufacturing:            +1.24 percent

primary metals:                                   +5.76 percent

fabricated metals products:                  -7.68 percent

non-electrical machinery:                     -7.08 percent

transportation equipment:                    +9.67 percent

That is, as artificially cheap foreign steel poured into the U.S economy, total factor productivity growth in most of the chief metals-using sectors shifted into reverse – and by startling extents. The only exceptions were transport equipment and durable goods as a whole, with the former clearly holding up the latter. And even in both these cases, total factor productivity growth slowed dramatically.

True, the letter’s signatories claim that they support continued tariffs on steel and aluminum imports from China – the main overcapacity and over-production culprit. They also say they back “negotiation of global arrangements to deal with overcapacity.”

But this position looks phony given their opposition to import quotas for steel from countries where tariffs have been lifted (South Korea, Brazil, and Argentina) because these measures allegedly have “placed severe supply constraints on U.S. manufacturers and created even more business uncertainly than tariffs regarding exports from these countries.” In other words, the signatories are opposed to the very policies that have helped ensure that all other metals-producing countries don’t simply keep transshipping China’s over-production into the U.S. market, or respond to China’s glutting their steel market by ramping up their own exports to the United States.

So the real message being sent by the manufacturers’ metals tariffs letter couldn’t be clearer: “We want to regain access to that artificially cheap foreign steel, regardless of its impact on the entire economy’s future.” Arguably, that’s an appropriate, or at least understandable, priority for companies viewing their prime obligation as maximizing shareholder value at any given moment. But just as understandably, it’s the type of priority that America’s political leaders should emphatically reject.

(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.

(What’s Left of) Our Economy: A Stunning Downgrade for U.S. Manufacturing Labor Productivity Growth

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BLS, bubbles, Bureau of Labor Statistics, David P. Goldman, Financial Crisis, Great Recession, labor productivity, manufacturing, multi-factor productivity, non-farm business, offshoring, productivity, recovery, total factor productivity, unit labor costs, {What's Left of) Our Economy

Wow! There were so many important results flowing from last week’s final (for now) government data on third quarter U.S. labor productivity, I hardly know where to begin. (I’m also feeling a little sheepish about waiting so long to report on these data, but it’s just another sign that we’re living in a target-rich commentary environment, as RealityChek‘s motto suggests.) But after finishing this post, I feel confident you’ll agree that the big downward historical revisions to manufacturing labor productivity growth deserve the most attention.

Not that the new figures on overall labor productivity (for the so-called non-farm business sector) were anything to sneeze at. These new numbers cover the narrowest measure of productivity (gauging only output per hour worked by an individual American employee) but as known by RealityChek regulars, they’re issued on a much more timely basis than the multi-factor or total factor data – which measure the output generated by a wide range of inputs.

And this update on third quarter labor productivity confirmed that it grew at its highest sequential annualized rate (2.95 percent) since the third quarter of 2014 (4.34 percent). The revised labor productivity gain was actually a touch smaller than the originally reported 2.97 percent rise, but not nearly enough to change the overall story. If this rate of improvement continues, that would be excellent news, since strong productivity growth is an economy’s best bet for a sustainable increase in economic growth and living standards.

At the same time, analyst David P. Goldman has noted that the new data add to compelling evidence that recent years have seen a reversal in the relationship most economists have long assumed (and that was borne out by by these same statistics) between unit labor costs (a main labor component of the productivity statistics) and the broadest measures of unemployment. As Goldman just observed, normally, they move in opposite directions – i.e., when joblessness is rising, the price of labor generally (and logically) falls, and vice versa. But since 2014, unemployment has kept tumbling, but labor costs have fallen as well. If this trend continues, that would be much worse news, since it would undermine the portrayal of productivity growth as a boon to the nation’s workers. (And a richly deserved hat-tip to a Twitter follower of mine, who goes by “Field Roamer” for calling my attention to this post.)

It’s been clear throughout this current U.S. economic recovery that wage growth has been unusually weak, but Goldman’s post paints the paycheck picture in a much grimmer light, and that’s definitely worth exploring further.

But to me, the manufacturing revisions deserve center stage, both because of their magnitude and the long time frame they cover – all the way back to 1987, when manufacturing labor productivity began to be tracked. I’ll let the Bureau of Labor Statistics (BLS), which calculates productivity for the U.S. government, summarize its dreary conclusions:

“A large upward revision to the change in the annual manufacturing productivity index from 2008 to 2009 was more than offset by downward revisions in adjacent years, and the average annual rate of growth from 2007 to 2012 was revised down from 2.9 percent to 1.2 percent. The average annual rate of manufacturing productivity growth during the current business cycle from 2007 to 2016 was revised down from 1.6 percent to 0.9 percent, and the long-term rate for the entire series from 1987 to 2016 is now 2.8 percent, compared to the previous estimate of 3.2 percent.”

In other words, over roughly the last thirty years, labor productivity in industry has risen 12.50 percent more slowly than previously reported. And manufacturing’s performance on this crucial front wasn’t great to start with.

Another way to look at the new numbers is to see how they affect what we know of America’s manufacturing labor productivity performance during the most recent economic expansions – a method that gives us the best apples-to-apples data. If your jaw doesn’t drop, it should.

The 1990s expansion still comes across as a period of robust manufacturing labor productivity growth. The cumulative increase was downgraded only from 46.81 percent to 45.94 percent.

But check out the new results for the previous decade’s recovery. Viewed through the lens of the old productivity data, its performance was excellent, and surprisingly so. After all, this expansion was fueled by the inflation of the credit and housing bubbles whose bursting led to the global financial crisis and the Great Recession. Yet the BLS had been saying that its cumulative productivity gain was 41.23 percent – just about as good as the 1990s advance factoring in this recovery’s shorter duration.

The new numbers – only 30.08 percent manufacturing labor productivity growth – are much more consistent with the idea that the previous economic recovery was marked largely by phony, unsustainable growth.

And as for the present recovery? The old data already made clear what a productivity disaster it’s been. Though it’s lasted nearly as long as the 1990s expansion, the previous BLS data pegged its total manufacturing labor productivity growth at only 20.93 percent – just about half the rate generated during the 2000s expansion.

The new rate? Only 9.41 percent, meaning its been cut nearly in half. Moreover, according to the new figures, the current recovery’s manufacturing labor productivity growth rate represents a much greater deterioration from the performance of the bubble recovery than had been reported. At least by this measure, American economic growth was already appearing even less healthy these days than it was leading up to the last meltdown produced by fake prosperity. Now this problem looks much worse. 

In addition, don’t forget:  Even these dreadful numbers probably overstate manufacturing labor productivity’s advances. Why? Because as the BLS acknowledges, its methodology for calculating this indicator include the effects of offshoring: simply substituting foreign workers for American workers. Since the total number of workers doesn’t change, the productivity figures for U.S. factories and related facilities are artificially inflated – and for reasons having nothing to do with greater efficiency. 

And these results raise all sorts of perplexing questions. For example, I’ve been arguing for quite some time that the overall slowdown in American labor productivity growth must surely stem from the trade- and offshoring-related losses of so much domestic industry – which has generally been the economy’s productivity growth leader. But the new BLS statistics indicates that there could be a bigger labor productivity growth problem within manufacturing itself. Alternatively, these losses could have been concentrated in especially high-productivity sectors of manufacturing – or trade and offshoring have had little or nothing to do with the problem to begin with.

More light could be shed on these questions by comparing America’s manufacturing labor productivity performance with that of other countries. Has it been better? Worse? Some short-range data I’ve seen indicate that the slowdown has been widespread across the globe, at least between 2015 and 2016. But I need to dive much deeper into these statistics to draw firmer conclusions.

Further, how significantly will these new labor productivity results affect the broader multi-factor productivity results? BLS hasn’t scheduled its next report on this indicator, so my oft-used advice to “stay tuned” applies to me, too, in this case.

(What’s Left of) Our Economy: New Data Show a New Sharp U.S. Productivity Divide

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labor productivity, manufacturing, multi-factor productivity, productivity, recession, recovery, total factor productivity, {What's Left of) Our Economy

They’re only preliminary, but the manufacturing labor productivity numbers for the third quarter released by the Labor Department this morning were total stunners. They showed that, by this narrowest measure of efficiency, manufacturing’s performance worsened sequentially by 5.13 percent at an annual rate. If it holds, that would be the biggest quarter-to-quarter decline since the first quarter of 2009 (during the depths of the last recession), when it plunged by a dizzying 17.37 percent.

(Labor productivity examines manufacturing’s efficiency according to how much output is produced by each hour that a worker is on the job. Economists also measure productivity by looking at a greater number of inputs – like capital, energy, and materials – in addition to labor. But the government data on this total factor productivity, or multi-factor productivity, comes out on a less timely basis.)

The only good news for industry in the new report from the Labor Department is that the second quarter’s annualized labor productivity growth was revised up from 2.82 percent to 3.39 percent.

As a result of these new statistics, labor productivity in manufacturing is up by 20.93 percent during the current economic expansion – which began in the second quarter of 2009. That may sound pretty good, but during the previous expansion, which was much shorter, it rose by 41.23 percent. And during the expansion before that (which was a bit longer), it advanced by 46.81 percent. So we’re still seeing a major slowdown.

The non-farm business sector (the Labor Department’s main measure of the entire economy) fared much better on the labor productivity front, with third quarter annualized growth of 2.97 percent. That’s the best such result since the third quarter of 2014 (4.34 percent). The second quarter annual growth rate of 1.53 percent was unchanged.

Still, even this performance leaves non-farm business labor productivity in the doldrums historically speaking. It’s increased by just 9.45 percent during the current recovery – much slower than manufacturing’s rise, and much slower than its own 16.03 percent and 23.25 percent improvements during the two previous recoveries.

But let’s end this particular post on a (somewhat) positive note. The final second quarter productivity growth figures were revised up twice for manufacturing and once for the non-farm business sector. So maybe the next Labor Department report will show better productivity performance as well. Since strong productivity growth is a key to boosting living standards on a lasting basis, that would be about the best economic news any American could imagine. 

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

Tags

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

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

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

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

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

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

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

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

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

2Q 1991 to 1Q 2001: +23.25 percent

4Q 2001 to 4Q 2007: +16.03 percent

2Q 2009 to present: +8.65 percent

And here are the same figures for manufacturing:

2Q 1991 to 1Q 2001: +46.81 percent

4Q 2001 to 4Q 2007: +41.23 percent

2Q 2009 to present: +22.33 percent

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

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

(What’s Left of) Our Economy: More Evidence that Manufacturing’s Productivity Growth is Slowing

Tags

labor productivity, manufacturing, manufacturing renaissance, multi-factor productivity, productivity, total factor productivity, {What's Left of) Our Economy

Productivity, as I’ve repeatedly noted, is considered one of the most mysterious aspects of economics. Even most economists agree. And with the recent release of new, detailed government data on manufacturing productivity, the subject got even mysterious-er. At the same time, if these figures are reliable (and many smart folks insist they aren’t), then worries about weakening manufacturing’s productivity performance just received important new justifications. And claims that domestic manufacturing has been renaissance-ing just took on lots more water.

Just to remind, productivity is important because it’s one of the key determinants of American living standards. Broadly speaking, if American businesses and their employees can figure out how to do more with less, the companies will find it much easier to pay their workers more without sacrificing profits. Moreover, higher pay flowing from greater efficiency doesn’t fuel inflation.

Also to remind, the government follows two measures of productivity. Its labor productivity reports come out each quarter, and therefore attract the most attention. They tell us how much the economy turns out for each hour a worker works. The multi-factor productivity (also called total factor productivity) reports take longer to compile, largely because (as the names suggest) they look at a much wider variety of inputs (like spending on new equipment and fuel and parts and components). Also important to remember: The labor productivity numbers tend to be distorted (to the upside) by the simple offshoring of output (and labor). That’s clearly not the kind of productivity improvement that strengthens the American economy. The multi-factor productivity figures aren’t biased in this way.

What the Labor Department released late last month was its most recent look at the multi-factor performance for 86 different manufacturing sectors and two transportation-related sectors. Because of that time lag I mentioned, the new numbers only take the story up to 2013. Even given this lag, though, the picture is anything but encouraging.

There’s a ton of information in this study, and its predecessors, and I’ll probably return to the report in upcoming posts. But for now what seems most important to me is how the numbers of manufacturing industries that have achieved multi-factor productivity growth have changed over time. Essentially, this number isn’t growing. Chart 4 tells the story.

It looks at this subject over more than a quarter century, and at first glance, over time, there doesn’t seem to be much of an underlying trend. In 1987, 50 of the manufacturing industries studied achieved greater multi-factor productivity. In 2013 only 38 did, but in between, the number bounces all over the place.

As usual, though (and as the Labor Department points out), the best way to look at economic data is to examine it as it changes during the economy’s main cycles – its recessions and its expansions. So it’s important to recognize, as the report notes, that during this period, “the number of manufacturing industries with growth in multifactor productivity was highest in 2003 and 2010. These were years of economic growth following recessions.” So, by the way, was 1992, and manufacturing’s multi-factor productivity was pretty good then, too.

But comparing these post-recessionary years generates a more discouraging conclusion. As is evident from the chart, the multi-factor productivity bounceback in manufacturing – at least measured by the number of sectors where it grew, has been decidedly weaker following the last recession than it was after its early 1990s predecessor. The latest rebound is also weaker than that following the early 2000s recession – though multi-factor productivity fared better after that downturn than after the 1990s slump.

An optimist could reply that 26 years is a pretty short time span, and that more definitive conclusions require looking at longer periods – and that’s an entirely reasonable position to take. And again, major questions do surround the reliability of productivity data. But what it also means is that these optimists face the burden of proof to show that productivity in American manufacturing isn’t facing serious challenges.

 

(What’s Left of) Our Economy: Productivity, as Well as Growth, is in Retreat

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Bureau of Labor Statistics, competitiveness, gross domestic product, growth, Jobs, Labor Department, labor productivity, living standards, multi-factor productivity, offshoring, productivity, recovery, technology, total factor productivity, {What's Left of) Our Economy

It’s hard to imagine a worse economic report coming out from the government than the revised look at first quarter productivity released this morning by the Bureau of Labor Statistics. It’s more important – and more troubling – than the first quarter economic growth contraction reported by Washington, and not because of the growing questions about whether such gross domestic product (GDP) figures have been fully taking into account the effects of harsh winters.

Productivity ultimately matters more than growth because its improvement is the best guarantee that whatever expansion the economy can generate is healthy and therefore sustainable. It’s also critical to raising living standards on a durable basis, too, as well as maintaining and enhancing global competitiveness. So be very, very concerned about the findings that labor productivity actually fell on a quarterly basis during the first three months this year, and that it’s now dropped for two straight quarters. And be even more concerned that this kind of back-to-back decrease hasn’t happened since early 2006. (The Labor Department also measures multi-factor, or total factor, productivity, which includes inputs other than workers, their hours, and their pay, but those broader data take much longer to calculate.)

Just as bad, the lousy initially reported first quarter figures were revised way down for the two largest sectors of the economy measured – businesses and non-farm businesses. Whereas the quarterly falloff for each was first judged to be 1.9 percent, it’s now pegged at 3.1 percent.

America’s manufacturers turned in a better performance relatively speaking, and in the process reminded how crucial they remain to the nation’s hopes for productivity improvement. Their revised first quarter sequential decline was “only” one percent, and that represented a slight upgrade from the initially reported 1.1 percent decrease. And the 0.1 percent fourth quarter 2014 dip was revised up to the flat-line.

Of course, even two quarters do not a trend make, and perhaps weather was also an issue on this front, as economic optimists claim regarding the first quarter GDP decline. But the best longer-run figures expose this view as pollyannish. Just compare how productivity has changed during the last three American economic recoveries – including the upturn that’s now approaching its sixth birthday.

Comparing recoveries (or recessions) is the most reliable way of determining economic trends because it eliminates the effects of business cycles. And to improve reliability even further, since the productivity numbers for the current recovery cover its first 23 quarters, let’s use that as the time frame for the others.

During the 1990s recovery – sometimes called the Clinton Boom – labor productivity for non-farm businesses increased by 9.37 percent during its first 23 quarters. (That’s the category most closely watched by economists.) Take out financial corporations and this growth is better – 11.22 percent. And manufacturers boosted their labor productivity by more than twice that rate – 22.71 percent.

Productivity advanced even faster during the 2000s expansion – which is a little surprising because its overall nature was so bubble-y. Nonetheless, the official data show that non-farm business productivity during its first 23 quarters grew by 15.58 percent – much faster than during the Clinton Boom. Strip out finance, even more interesting, and the labor productivity advance slowed during the last recovery. But it still grew by 14.11 percent. And manufacturing once again turned in stellar results, hiking its labor productivity by 23.51 percent.

What about the current recovery? It’s dreary by comparison. During its first 23 months, non-farm businesses have improved their labor productivity by only 6.14 percent – less than half the rate of the previous expansion. Non-financial corporations are back to out-performance, but their productivity gains have also lagged those of the 2000s, coming in at just 10.18 percent. Manufacturing has remained the economy’s labor productivity leader, but its increase has slowed to just 14.77 percent.

Most economists agree that measuring productivity accurately is one of their trickiest challenges. In fact, many believe that the official figures are understating recent gains because they’re not capturing the benefits of new information technologies and their adoption by business. At the same time, American technology development didn’t begin with the internet, and the introduction of previous generations of inventions, like electricity and the automobile, were arguably at least as game-changing. Further, the Labor Department keeps reminding us that simple job offshoring contributed nearly 25 percent of the labor productivity advances it recorded during the 1996 to 2007 period. (Later estimates apparently aren’t available.) And that trend hasn’t been dominated by new technology – though surely better communications has made offshoring easier to carry out.

So until the dissenters make their case more convincingly, it seems all too clear that America’s labor productivity performance is faltering badly.  Moreover, despite its own deteriorating performance, without manufacturing, it would be hard to describe America’s as a productive economy at all.

(What’s Left of) Our Economy: New Productivity Data – & Questions

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China, competitiveness, labor productivity, manufacturing, manufacturing renaissance, Mexico, multi-factor productivity, Obama, productivity, The Conference Board, total factor productivity, Trade, {What's Left of) Our Economy

Sometimes I think that RealityChek could easily justify its existence simply as an exercise in granular analysis – a fancy way of saying looking at the details of research findings and various statistics sets. You’re the ultimate judge of course, but consider some revelations from the weeds of some new global productivity data released this week by The Conference Board (and first reported by Chris Giles of the Financial Times). They could speak volumes about the raging debate in the United States about trade, manufacturing, and economic competitiveness.

First a word of warning: Even the snootiest economist will admit that measuring productivity and its changes is one of the discipline’s biggest challenges. And if the U.S. government has its problems compiling definitive statistics in this field, imagine the difficulties faced by governments in developing countries, which simply can’t afford to devote many resources to the task, and where much economic activity is off the books. Then there are the issues created by countries like China, where even the leadership acknowledges substantial books-cooking at all levels of government – especially local.

All the same, the Conference Board report was especially important because it claims that the productivity slowdown being suffered by the United States is showing up all around the world. Globally, the business research group says, labor productivity (output per person hour of work) grew last year at the same weak 2.1 percent pace as 2013. But 2014 labor productivity gains weakened everywhere but India and sub-Saharan Africa, and it fell in Japan.

Even worse, growth in total factor productivity (which includes all inputs into production, not just labor) has been nearly non-existent across the globe on average for the third year in a row, and that’s a worse stretch since 1999. And The Conference Board predicts another drop for 2015 in labor productivity growth – led by low-income countries, where it should be greater, all else equal, due to catch-up effects.

The Board has done a great job presenting tables and charts that describe the picture region-by-region, country-by-country, and even on the basis of high-income versus low-income countries. But for those following American competitiveness issues, and especially the trade and globalization angles, they raise two big questions.

First, although it’s widely contended – including by President Obama – that the United States is gaining competitiveness largely at China’s expense, the productivity numbers say exactly the opposite. It’s true that China’s labor productivity growth has fallen recently from the lofty 9-plus percent average annual growth achieved between 1999 and 2012 – no doubt largely due to increasing wages. But the decrease has only been to a seven percent rise in 2014. In the United States, the decline has been proportionately greater – from annual average gains of 2.4 percent between 1999 and 2006 and 1.3 percent from 2007 to 2012 to 0.5 percent in 2014. Eccch!

Moreover, the Conference Board report doesn’t contain any information about the Chinese productivity numbers that matter most – those for export-oriented manufacturing. That’s where the competitiveness rubber hits the road vis-a-vis the U.S. economy. It’s also where China has benefited enormously from an influx of technology and management expertise from American and foreign-owned multinational companies.

The figures are different for total factor productivity (TFP – which is also called multi-factor productivity), but still no slam dunk for the U.S. comeback meme. In America, this form of productivity increased at an average annual rate of one percent from 1999 to 2006, and 0.2 percent from 2007 to 2012. In 2014, it rose by only 0.1 percent. The comparable Chinese performance was worse. TFP productivity jumped at an annual average rate of 4.4 percent between 1999 to 2006, slowed to an annual average of 2.7 percent in the next six years, and actually fell by 0.1 percent last year. But again, there’s no break-out for export-oriented manufacturing.

Then there’s the Mexico story. It’s also widely claimed that Mexico has profited from China’s faltering competitiveness. The overall productivity numbers are screaming that nothing of the kind should be happening. South of the border, labor productivity has barely budged since 1999, though notable improvement was registered in 2013 and 2014. And the TFP performance has been nothing less than disastrous, with absolute declines (not declining growth, but simple decreases) accelerating since 1999. At the same time, we lack breakouts for both manufacturing (which is overwhelmingly export-led) and for export-oriented manufacturing in particular, which is overwhelmingly dependent on the American market, and which has also received much foreign knowhow.  

Again, given the ongoing uncertainties about productivity measurement, all these figures should be taken with a boulder of salt. But here’s one potential implication no one should like: If there’s no evidence that changes in relative productivity are working in American industry’s favor, and trade policy clearly has not helped (judging from record recent U.S. deficits), then it looks like whatever manufacturing renaissance we’ve seen has been spurred by producers’ desire to be closer to their markets (for which no policy or business practice can take credit) and falling wages (for which no policy or business practice should want to take credit).