At this stage in the cycle we would expect to see productivity rising. Instead it has been declining these eight quarters. Even though auto and airplane manufacturers are doing well at the moment, it is not likely to last. One need only look at the overall trend in manufacturing to see this is true. It is symptomatic of a lack of real savings and capital needed to drive production. We can expect this trend to continue. With massive fiscal stimulus and two rounds of liquidity injections, one should ask why.
In yesterday’s mostly overlooked productivity report the Bureau of Labor Statistics reported that overall productivity of workers in the U.S. declined by 0.9% in Q1 2012. Here is the chart which shows the trend (gray bars) with my added red line to emphasize the trend:
We can see that the “recovery” brought productivity to a peak Q1 2010 and has been declining for the past 8 quarters. shouldn’t productivity be going up after four years of diligent work by the Fed and the government? They have followed the advice of major Keynesian economists like Paul Krugman by spending us into higher and higher deficits and providing trillions in liquidity. Of course Professor Krugman would say they haven’t spent enough.
The BLS calculates real output and divides it by hours worked. The idea is that this is a good overall indicator of how efficient workers are in turning out products. Capital theory and history say that workers are more efficient, i.e., more productive, when they have better tools and machines to produce products. All things being equal, the more capital a firm has, machines, computers, software, assembly lines, the more workers produce. Of course we know that all things are not equal and that’s why there is much diversity between worker output. Also we know there is no actual “national” productivity, but rather individual output which is somehow aggregated into a total number that may or may not tell us much. It doesn’t mean much if the output of lawyers is down while output of auto workers is up. Yet that is what this measures.
Fortunately, the BLS breaks it down to show us what is happening with manufacturers, who benefit the most from capital investment/output:
Nonfarm Business/Business productivity is down 0.9% to 1.0%. Yet manufacturing, general and durable goods, is up, strongly (5.2% and 9.9%). Nondurables are down. Here’s what it means. Overall output declines because GDP is down, thus hours, while declining, haven’t declined as fast as GDP, which indicates that for the same hours, output as evidenced by GDP is slowing down. No news there.
Manufacturing is up, especially durables, because auto output in increasing, as is “Aerospace” which includes airplanes. These are major industries that impact the overall measure of manufacturing. So, increased sales drives output, similar wages and hours, equals rising productivity. There are reasons for these increases. For autos consumer interest rates are at record lows (thanks to the Fed) and is allowing pent-up demand to be satisfied. For airlines, traffic is up and they are placing orders for new planes. Boeing (BA) which is the big player in this field had a great Q1. One wonders what worldwide recession/stagnation will bring to Boeing.
On the other hand, nondurables (such as food and beverages, textiles, and petroleum) declined QoQ and YoY. This reflects an underlying weakness in the economy as demand for basic commodities and unfinished goods declines.
Regardless of the merits of measuring overall productivity, the trend is disturbing and reflects an underlying weakness in the economy. At this stage in the cycle we would expect to see productivity rising. Instead it has been declining these eight quarters. Even though auto and airplane manufacturers are doing well at the moment, their gains are not likely to last. One need only look at the overall trend in manufacturing to see this is true. It is symptomatic of a lack of real savings and capital investment needed to drive production. If output was indeed rising faster than wages and hours this should be reflected in overall demand for goods, stimulating manufacturing, but that isn’t the case. Declining demand as a result of capital destruction from two (and a half) r0unds of QE is no surprise.