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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: You Bet that Mass Immigration Makes America Less Productive

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amnesty, Bureau of Labor Statistics, construction, demand, Donald Trump, economics, Forward.us, hotels, illegal aliens, immigrants, Immigration, labor productivity, productivity, restaurants, supply, total factor productivity, wages, {What's Left of) Our Economy

An archetypical Washington, D.C. swamp denizen thought he caught me with my accuracy pants down the other day. Last Sunday’s post restated a point I’ve made repeatedly – that when countries let in too many immigrants, their economies tend to suffer lasting damage because businesses lose their incentives to improve their productivity – the best recipe for raising living standards on a sustainable, and not bubble-ized basis, as well as for boosting employment on net by fostering more business for most existing industries and enabling the creation of entirely new industries.

The reason mass immigration kneecaps productivity growth? Employers never need to respond to rising wages caused by labor shortages by buying labor-saving machinery and technology or otherwise boost their efficiency. Instead, they continue the much easier and cheaper approach of hiring workers whose pay remains meager because immigrants keep swelling the workforce.

It’s a point, as I’ve noted, strongly supported by economic theory and, more important, by evidence. But Todd Schulte, who heads a Washington, D.C.-based lobby group called Forward.us, wasn’t buying it. According to Schulte, whose organization was founded by tech companies like Facebook with strong vested interests in keeping U.S. wages low, “the decade of actual [U.S.] productivity increases came directly after the 1986 legalization AND 1990 legal immigration expansion!”

He continued on Twitter, “giving people legal status and… expanding legal immigration absolutely has not harmed productivity in the last few decades in the US.”

So I decided to dive deeper into the official U.S. data, and what I found was that although there are bigger gaps in the productivity numbers than I’d like to see, there’s (1) no evidence that high immigration levels following the 1986 amnesty granted by Washington to illegal immigrants and the resulting immigration increase mentioned by Schulte improved the national productivity picture over the pre-amnesty period; and (2) there’s lots of evidence that subsequent strong inflows of illegal immigrants (who Schulte and his bosses would like to see amnestied) have dragged big-time on productivity growth.

First, let’s examine the productivity of the pre-1986 amnesty decades, which provides the crucial context that Schulte’s claim overlooks.

According to U.S. Bureau of Labor Statistics figures, during the 1950s, a very low immigration decade (as shown by the chart below), labor productivity grew by an average of 2.63 percent annually. Significantly, this timespan includes two recessions, when productivity normally falls or grows unusually slowly.

Figure 1. Size and Share of the Foreign-Born Population in the United States, 1850-2019

During the 1960s expansion (i.e., a period with no recessions), when immigration levels were also low, the rate of labor productivity growth sped up to an annual average of 3.26 percent.

The 1970s were another low immigration decade, and average labor productivity growth sank to 1.87 percent. But as I and many other readers are old enough to remember, the 1970s were a terrible economic decade, plagued overall by stagflation. So it’s tough to connect its poor productivity performance with its immigration levels.

Now we come to the 1980s. Its expansion (and as known by RealityChek regulars, comparing economic performance during like periods in a business cycle produces the most valid results), lasted from December, 1982 to July, 1990, and saw average annual labor productivity growth bounce back to 2.24 percent.

As noted by Schulte, immigration policy changed dramatically in 1986, and as the above chart makes clear, the actual immigant population took off.

But did labor productivity growth take off, too? As that used car commercial would put it, “Not exactly.” From the expansion’s start in the first quarter of 1982 to the fourth quarter of 1986 (the amnesty bill became law in November), labor productivity growth totalled 10.96 percent. But from the first quarter of 1987 to the third quarter of 1990 (the expansion’s end), the total labor productivity increase had slowed – to 5.76 percent.

The 1980s are important for two other reasons as well. Nineteen eighty-seven is when the Bureau of Labor Statistics began collecting labor productivity data for many U.S. industries, and when it began tracking productivity according to a broader measure – total factor productivity, which tries to measure efficiency gains resulting from a wide range of inputs other than hours put in by workers.

There’s no labor productivity data kept for construction (an illegal immigrant-heavy sector whose poor productivity performance is admitted by the sector itself). But these figures do exist for another broad sector heavily reliant on illegals: accommodation and food services. And from 1987 to 1990 (only annual results are available), labor productivity in these businesses increased by a total of 3.45 percent – worse than the increase for the economy as a whole.

On the total factor productivity front, between 1987 and 1990 (again, quarterly numbers aren’t available), it rose by 1.23 percent for the entire economy, for the construction industry it fell by 1.37 percent, for the accommodation sector, it fell by 2.30 percent, and for food and drinking places, it increased by 2.26 percent. So only limited evidence here that amnesty and a bigger immigrant labor pool did much for U.S. productivity.

As Schulte pointed out, the 1990s, dominated by a long expansion, were a good productivity decade for the United States, with labor productivity reaching 2.58 percent average annual growth and total factor productivity rising by 10.87 percent overall. But when it comes to labor productivity, the nineties still fell short of the 1950s (even with its two recessions) and by a wider margin of the 1960s.

But did robust immigration help? Certainly not in terms of labor productivity. In accommodation and food services, it advanced by just 0.84 percent per year on average.

Nor as measured by total factor productivity. For construction, it actually dropped overall by 4.94 percent. And although it climbed in two other big illegal immigrant-using industries, the growth was slower than for the economy as a whole (7.17 percent for accommodation and 5.17 percent for restaurants and bars).

Following an eight month recession, the economy engineered another recovery at the end of 2001 that lasted until the end of 2007. This period was marked by such high legal and illegal immigration levels that the latter felt confident enough to stage large protests (which included their supporters in the legal immigrant and immigration activist communities) demanding a series of new rights and a reduction in U.S. immigration deportation and other control policies.

Average annual labor productivity during this expansion grew somewhat faster than during its 1990s predecessor – 2.69 percent. But annual average labor productivity growth for the accommodation and food services sectors slowed to 1.19 percent, overall total factor productivity growth fell to 1.19 percent, and average annual total factor productivity changes in accommodations, restaurants, and construcion dropped as well – to 6.36 percent, 2.67 percent, and -9.08 percent, respectively.

Needless to say, productivity grows or shrinks for many different reasons. But nothing in the data show that immigration has bolstered either form of productivity, especially when.pre- and post-amnesty results are compared. In fact, since the 1990s, the greater the total immigrant population, the more both kinds of productivity growth deteriorated for industries relying heavily on illegals. And all the available figures make clear that these sectors have been serious productivity laggards to begin with.

And don’t forget the abundant indirect evidence linking productivity trends to automation – specifically, all the examples I’ve cited in last Sunday’s post and elsewhere of illegal immigrant-reliant industries automating operations ever faster — and precisely to offset the pace-setting wage increases enjoyed by the lowest income workers at least partly because former President Trump’s restrictive policies curbed immigration inflows so effectively. 

In other words, in the real world, changes in supply and demand profoundly affect prices and productivity levels – whatever hokum on the subject is concocted by special interest mouthpieces who work the Swamp World like Todd Schulte.

(What’s Left of) Our Economy: A U.S. Productivity Report with Something for Everyone

Tags

CCP Virus, coronavirus, COVID 19, labor productivity, productivity, stay at home economy, technology, total factor productivity, Wuhan virus, {What's Left of) Our Economy

As known by RealityChek readers, I’m always hesitant to make too much of official U.S. productivity statistics because many economists believe that these various measures of efficiency are unusually hard to measure. (Google “productivity,” “data,” “measurement,” and “problems” and you’ll see what I mean.)

Moreover, I’ve been especially hesitant during the CCP Virus era, because the pandemic and related lockdowns and behavioral changes have been so unprecedented, and it’s still far from clear how lasting the effects will be.

Having said that, these data surely aren’t completely meaningless either, and a major finding of theirs has been so dramatic that it’s tough to dismiss: Both the relatively narrow measure of labor productivity, or the broader measure of total factor productivity show a big slowdown in productivity growth in recent decades.

For total factor productivity, here are the figures that compare the performance of non-farm businesses in percentage terms during the last three economic recoveries (i.e., using the best apples-to-apples data) before the CCP Virus-era bounceback that began in the third quarter of 2020:

1990s expansion (1991-2000): +10.34 percent

bubble decade expansion (02-07): +6.91 percent

post-Great Recession expansion (10-19): +4.88 percent

The main evidence for the slowdown is the fact that even though the latest expansion was the same length as that of the 1990s, its cumulative total factor productivity growth was less than half as strong.

In this context, it’s noteworthy today’s Labor Department release on total factor productivity (which, unlike labor productivity, tries to show business’ success in using a wide range of inputs – not just workers – to improve efficiency) has something for both optimists and pessimists.

Glass-half-full types will observe that, in 2021, total factor productivity grew by 3.17 percent – a record in a statistical series going back to 1987. The previous fastest annual pace was 1992’s 2.88 percent.

The glass-half-empty types, though, can argue that even this big advance won’t be enough to end the long-running slowdown. In the first place, the excellent 2020-21 impovement followed a 1.97 percent 2019-20 decrease that was the worst performance of all time. And in that vein, because solid total factor productivity increases are typical of early stages of an economic recovery, the 2021 year-on-year jump may only be a post-CCP Virus reversion to a dreary long-term mean.

The optimists can counter by claiming that pandemic-driven trends like severe labor shortages, consequently rising wages, and the advent of a work-at-home era in both the public and private sectors will push employers to invest more in labor-saving and communications technology in particular. The result will be a turning point in the recent crummy U.S. productivity story.

The only certainty I can see is that the virus is becoming endemic and that its economic growth-depressing effects will fade steadily (at least until the next pandemic). Other than that, I’ll simply say that the force of inertia alone indicates to me that the burden of proof for a durable productivity upswing – and for a needed U.S. transition from prosperity based on government stimulus to well-being with sturdier foundations – still lies with the optimists.

(What’s Left of) Our Economy: Some New Trump-Friendly Data on Manufacturing Productivity

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Barack Obama, Labor Department, manufacturing, metals tariffs, multi-factor productivity, productivity, tariffs, total factor productivity, Trade, trade wars, Trump, {What's Left of) Our Economy

If I had a list of twenty top wishes, more timely U.S. government publication of the multifactor productivity statistics wouldn’t make the cut. All the same, I’d like to see the posting of this data sped up for several reasons, including:

>Multi-factor productivity (also called total factor productivity) is the broadest of the measures of economic efficiency tracked by Washington, purporting to show how much in the way of all kind of inputs are needed to produce a unit of economic output in a given time period; and

>although even stalwarts of the rarely humble economics profession agree that productivity is challenging to measure precisely, they also mainly tend to agree that the stronger a country’s productivity performance, the likelier that country’s population will be living standards rise on a sustainable, not bubbly, basis.

So even though the new detailed multi=factor productivity statistics released by the Labor Department late last week only bring us through 2018, they’re worth contemplating anyway – and even for those focused tightly on politics in this presidential election year. For these latest numbers somewhat further undercut widespread claims that President Trump’s tariff-heavy trade policies have been weakening American domestic manufacturing (which is strongly affected by trade), and indeed add to those overall economic metrics for which the Trump years have seen better performance than the Obama years. (As known by RealityChek regulars, the Obama administration holds an edge here.)

Let’s start with what the new Labor Department release says about how many of the industries it follows achieved multi-factor productivity growth during the last two Obama years and the first two Trump years (the best basis for comparison, since it examines time spans closest together in the same – expansionary – business cycle). Here are the numbers:

2015: 21 of 86

2016: 37 of 86

2017: 32 of 86

2018: 44 of 86

On average, these gains were considerably more widespread under the Trump administration. Also noteworthy: Although the number of multi-factor productivity growers dipped between the final year of the Obama administration and the first year of the Trump administration, that first Trump year featured no tariff increases. These moves didn’t begin until the early spring of 2018 – a year in which the numbers of productivity growers rose significantly.

Such figures by no means clinch the case that the tariffs helped domestic manufacturers – because a single year can’t make or break an argument; because trade policy was far from the only development influencing manufacturing; because none of the developments that do influence productivity work their magic in ways convenient for calendar-watchers; and because the 2018 tariffs only covered aluminum and steel.

Still, it’s hard to look at these productivity numbers and see any harm done to U.S.-based manufacturing by the tariffs – or by the very good reasons at the time for assuming that many more were on the way, with all their implications for business plans.

But what about actual multi-factor productivity throughout the entire manufacturing sector. Here’s what separate Labor Department data reveal:

last two Obama years combined:  -2.15 percent

first two Trump years combined: +0.84 percent

Another Trump edge, and another reason for doubting the “tariff-mageddon” claims concerning manufacturing.

The multi-factor productivity reports also handily present the numbers of manufacturing sectors that enjoyed overall output growth year in and out. These data make the Trump years look superior, too, and cast further doubt on the tariff opponents’ credibility:

2015: 50 of 86

2016: 31 of 86

2017: 44 of 86

2018: 55 of 86

Unfortunately, even if the multi-factor productivity data for 2019 (a slower growth year for domestic industry) were available, robust conclusions about the Trump manufacturing record on this front per se, and especially about the effects of the tariffs would be difficult for the fair-minded to draw. After all, that’s the year when major tariffs on Chinese goods were imposed, and therefore when the inevitable inefficiencies they created began. In other words, U.S.-based manufacturers were just at the start of efforts to make supply chain and other adjustments to the levies, not at the end of this process. And the CCP Virus’ arrival and all the economic distortions it’s produced will complicate analysis going forward.

Moreover, although it should be “needless to say,” I’ll make the point again anyway: Major changes in U.S. trade policy toward China and overall were vital both for economic, national security, and – as has become clear this year – health security reasons.

As a result, here’s the firmest conclusion I can draw: The stronger U.S. manufacturing’s performance in improving multi-factor productivity remains, the easier these needed trade wars will be to win at acceptable prices.

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

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economics, economists, European Central Bank, exports, free trade, GDP, gross domestic product, imports, International Monetary Fund, labor productivity, productivity, productivity growth, total factor productivity, Trade, trade openness, World Bank, {What's Left of) Our Economy

The idea that the more international trade a country engages in, the more strongly its productivity will grow, is widely accepted among economists. Indeed, no less than the World Bank, the International Monetary Fund, and the European Central Bank (the eurozone’s version of America’s Federal Reserve) say so.

How then, can these august institutions and other believers explain the following: On the one hand according to the United Kingdom’s Royal Statistical Society, the country’s feeble annual average labor productivity growth of 0.3 percent over the last ten years was its “statistic of the decade”? Worse, it was the poorest decade for British productivity growth since the early 19^th century.

Yet on the other hand, during this period, the United Kingdom’s openness to foreign trade – a data point created by adding a country’s imports and exports and then expressing this sum as a percentage of its entire economy, or gross domestic product (GDP) – has for the most part been hovering near post-1960s highs. In other words, the more foreign trade the UK has been engaging in, the lower its productivity growth seems to have become.

Nor is this phenomenon restricted to the UK. The same pattern can be seen in the United States, although the country’s openness to trade is much lower than the United Kingdom’s in absolute terms (not surprising, since we’re comparing an island with a continental sized economy). RealityChek regulars shouldn’t have to be reminded about America’s discouraging collapse in labor productivity growth.

What about trade? In fairness, America’s openness to trade has been falling recently. But no, that’s not President Trump’s “fault.” The decline began in 2011, when trade’s share of GDP hit a post-1960 high of 30.79 percent. As of 2017 (the latest data year available according to this source), it still stood at 27.09 percent – much higher than the period average of 19.29 percent.   

Also in fairness: Simply because openness to trade for these two big national economies has coincided with lousy productivity growth doesn’t mean that openness to trade causes the problem (or vice versa). It doesn’t even mean that openness to trade is the main productivity culprit, for many different characteristics of an economy influence any single characteristic.

But certainly in light of the American and British experiences, even if the conventional wisdom is right and trade openness does encourage productivity growth, it’s clearly a policy choice that’s often overwhelmed by other features of that same economy. P.S. – it ain’t just the Anglo-Americans. The World Bank’s databases also portray global trade at only slightly off its all-time high as a share of the global economy. And guess what? It turns out that global productivity growth has been crappy lately, too, whether we’re talking labor productivity or total factor productivity (a broader gauge that measures output from the use of many different inputs, not just labor).

As a matter of fact, it’s not difficult to think of ways in which more trade can undermine productivity growth – e.g., if import floods decimate the sectors of the economy that have historically been its manufacturing leaders, or if trade policy fosters their offshoring. (Strong cases can be made for both propositions when it comes to American domestic manufacturing.) 

So the case that trade fosters productivity growth is hardly a slam dunk.  And that’s one more reason to believe that the broader case for free trade isn’t, either.

(What’s Left of) Our Economy: Back into Decline for U.S. Labor Productivity

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durable goods manufacturing, labor productivity, manufacturing, multifactor productivity, nondurable goods, nonfarm business, productivity, total factor productivity, {What's Left of) Our Economy

Well, that didn’t last long. After two straight quarters of encouraging growth, U.S. labor productivity is back in the doldrums, with this morning’s preliminary data from the Labor Department revealing a drop during the third quarter of this year.

At least, however, these latest figures on the narrowest measure of the economy’s efficiency, and ability to grow healthily and generate sustainably rising living standards contained a novel recent twist: U.S.-based manufacturing outperformed the Labor Department’s main definition of the broader economy – the “nonfarm business sector.”

Moreover, the results pointed to a trend I hadn’t recognized till now: Manufacturing’s transformation from a national productivity leader into a laggard, which began during the current economy-wide recovery (and probably began during the Great Recession preceding it) is heavily concentrated in nondurable goods manufacturing. Labor productivity in the larger durable goods super-sector is still growing faster than that of nonfarm businesses, though the gap between the two has shrunk decidedly.

As known by RealityChek regulars, labor productivity measures how much output an American worker turns out for each hour he or she is on the job. It’s not as broad a gauge as “total factor productivity” (AKA “multifactor productivity), which measures output per hour resulting from a wide array of inputs, including not only human beings but capital, energy, materials, and others. But the labor productivity numbers come out on a timelier basis.

The news for the second quarter’s final (for now) data was pretty good. The increase in nonfarm business labor productivity was upgraded from a 2.3 percent annualized rate to 2.5 percent. Manufacturing’s 2.2 percent annualized drop, however, was revised down to a 2.4 percent decrease – its worse such performance since the four percent plunge in the third quarter of 2017.

This morning’s first initial read on third quarter labor productivity reversed this pattern. Nonfarm business labor productivity was down 0.3 percent on an annualized basis – worse than the 0.1 percent dip for manufacturing, and its first shrinkage since the fourth quarter of 2015 (when it fell by 3.5 percent annualized).

But it was the more detailed figures on manufacturing’s third quarter that really caught my eye. Durable goods sectors’ labor productivity performance was in the black, growing at a 1.2 percent annual pace. But the nondurables result was deep in the red – down 1.5 percent.

Nor are these results aberrations, as the table below shows. It presents the total labor productivity growth rates during the previous two economic recoveries and the current upturn (to ensure the best, apples-to-apples findings). The main takeaway: Both super-sectors have suffered major labor productivity growth rates declines since the 1990s expansion. But during the current recovery (the longest on record in the United States), labor productivity growth in nondurables plummeted much faster than in durables (which wasn’t killing it on this front, either).

                                                                                  Durable mfg    Nondurable mfg

1990s expansion (2Q 1991-1Q 2001):                   +66.11 percent  +23.81 percent

bubble expansion (4Q 2001-4Q 2007):                 +34.59 percent  +24.01 percent

current expansion (2Q 2009 thru final 2Q 19):     +15.37 percent    +5.83 percent

current expansion (2Q 2009 thru prelim 3Q 19):  +15.71 percent    +5.44 percent

Moreover, as made clear from the table below, and its comparison of labor productivity growth in nonfarm businesses and in manufacturing as a whole during the same periods, however poor the durables’ performance, it’s still better than that of nonfarm businesses in an absolute sense. Nonetheless, its lead is down considerably.

                                                                         Non-farm business    manufacturing

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

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

current expansion (2Q 09 thru final 2Q 19):     +12.85 percent         +9.00 percent

current expansion (2Q 09 thru prelim 3Q 19):  +12.77 percent         +8.97 percent

Today’s productivity read was the first of three to be released for the third quarter (additional revisions will be made down the road), so it’s possible that the overall labor productivity result will wind up being an upturn rather than a downturn.  But for now, any talk of a new U.S. productivity growth revival looks premature. 

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

Tags

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

If there were two of me, I could have reported yesterday on both the new industrial production figures from the Federal Reserve and the new labor productivity data from the Bureau of Labor Statistics (BLS) that came out. Because progress in cloning tech has been incredibly disappointing, and since Washington keeps often pairing such releases, I had to choose one (the former). But the latter’s importance should never be forgotten, especially since it shows manufacturing’s performance on this crucial front has actually deteriorated, at least in a relative sense. This development, in turn, has big implications for President Trump’s tariff-heavy trade policies.

After all, these Trump levies, whether on metals or on products from China, increase cost pressures at various stages of individual companies’ production process or at various stages of industry supply chains when (as they often do) they cross national borders.

As a result, the companies involved can respond with various combinations of the following measures: They can increase the prices they charge to their customers (whether they’re other businesses, in the case of inputs used in producing goods and services, or consumers, in the case of the kinds of products sold by retailers). They can find alternative sources of supply (which rarely happens right away). They can eat the higher costs, and accept lower profits, in hopes of preserving market share. Or they can improve their productivity, and therefore offset the impact of higher costs through improved efficiency.

That last option is (which involves more than simple cost-cutting) is the best for the economy, including for workers, in the long run, since it’s a time-tested formula for boosting growth and living standards on a sustainable basis. But manufacturing’s deteriorating record in this regard indicates that American industry overall is failing this test.

To remind, labor productivity is the narrower of the two such measures of efficiency tracked by the BLS. It simply reveals how much of a particular good or service can be produced by the relevant workforce (adjusted for inflation) per each hour on the job. As the name implies, the broader measure, multi-factor productivity (also called total factor productivity) measures output per worker hour as a function of the use of many different inputs – e.g., capital and energy, as well as labor.

The manufacturing labor productivity lag becomes clear upon examining the latest results. It’s true that the sector’s first quarter sequential growth (at an annual rate) was revised up from 0.4 percent to 1.1 percent. But the comparable figure for non-farm businesses (BLS’ definition of the American economic universe for productivity measurement purposes) was much better – a 3.4 percent annualized gain revised up to 3.5 percent.

The gap widened further in the second quarter, at least according to yesterday’s preliminary results. Non-farm business labor productivity rose again, albeit at a slower 2.3 percent annual rate. But in manufacturing, labor productivity actually fell in absolute terms – by 1.6 percent at an annual rate.

Even more alarming are the longer-term trends, which are especially visible thanks to the labor productivity revisions going back to 2014 released by the Labor Department along with the preliminary second quarter results. Here are the pre-revision results for the last three economic expansions, including the one still ongoing, through the first quarter of this year. (RealityChek regulars know that the most useful economic analyses compare results during similar stages of the business/economic cycle.)

                                                                           Non-farm business   Manufacturing

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

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

current expansion: (2Q 2009 thru prev 1Q19):    +12.18 percent        +9.59 percent

These numbers demonstrate how the growth rate of labor productivity in manufacturing has slowed much more dramatically than that of the overall non-farm business sector.

Here are the results for the current expansion incorporating the revised first quarter figures:

                                                                          Non-farm business    Manufacturing

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

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

current expansion: (2Q 09 thru revd 1Q19):      +12.16 percent          +9.64 percent

Manufacturing’s performance ticked up and the non-farm business sector’s performance ticked down, but the big picture didn’t change much. And now for the results incorporating the preliminary second quarter results:

                                                                        Non-farm business   Manufacturing

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

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

current expansion: (2Q 09 thru prelim 2Q19):  +12.80 percent         +9.19 percent

Because of the second quarter’s non-farm business growth and manufacturing’s decline, the gap between the two became even bigger – and manufacturing’s longer-term slowdown became even more dramatic. 

And as if this big picture wasn’t bad enough, let’s not forget that much of manufacturing’s recent recorded labor productivity gains have come from a methodological oddity that results in the offshoring of production strengthening the labor productivity results.  That’s the kind of productivity improvement that the domestic economy clearly doesn’t need.  And revealingly, for all the claims over the years that offshoring is a plus for that domestic economy, including for its workers, the evidence sure isn’t showing up in the manufacturing labor productivity data.   

An optimist could note that these preliminary second quarter results represented manufacturing’s worst readings since the first quarter of 2018, and that the second quarter results can still be revised upward. A pessimist could reply, especially regarding the latter, “They’d better be.”

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

Tags

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

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

Tags

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

Tags

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.