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

Alan Tonelson |

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.

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