US nonfarm productivity declined 0.5% this quarter, down three consecutive quarters. This is the longest negative stretch since 1979.
Manufacturing productivity declined 0.2%.
The BLS calculates labor productivity, or output per hour, by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.
The Bloomberg Econoday economists’ consensus estimate was for a productivity gain of 5%. Instead, productivity declined 0.5%.
Highlights
Output picked up in the second quarter but not quite as much as hours worked or compensation. Productivity fell 0.5 percent in the quarter for the third decline in a row. This is the longest negative streak in the history of this report which goes back to just after WWII.
Unit labor costs rose 2.0 percent but, in a plus, were revised sharply lower in the first quarter which now shows a rare decline at minus 0.2 percent. But most readings in this report are not positive including the year-on-year rate for productivity which is down 0.4 percent for the first decline since second-quarter 2013. In an unfavorable contrast, year-on-year unit labor costs are up 2.1 percent.
Lack of business investment is unfortunately a central negative of this cycle and it results in weakening productivity for the nation. Americans are working more hours but production isn’t keeping up.
Recent History
First estimate for second-quarter non-farm productivity is expected to improve from a very weak first quarter with the consensus pointing at a plus 0.5 percent annualized rate and benefitting from a slightly higher but still weak rate of output. An improvement in output would hold down unit labor costs which are forecast to rise 1.8 percent, far lower than the 4.5 percent and 5.4 percent surges of the prior two quarters.
Longest Losing Streak Since 1979
The Wall Street Journal reports U.S. Productivity Fell for Third Straight Quarter.
Nonfarm business productivity, measured as the output of goods and services produced by American workers per hour worked, decreased at a 0.5% seasonally adjusted annual rate in the second quarter as hours increased faster than output, the Labor Department said Tuesday.
It was the third consecutive quarter of falling productivity, the longest streak since 1979. Productivity in the second quarter was down 0.4% from a year earlier, the first annual decline in three years and just the sixth year-over-year drop recorded since 1982.
Productivity growth started to slow before the 2007-2009 recession and has all but stalled in recent years.
Yellen Cautiously Optimistic on Productivity
Federal Reserve Chairwoman Janet Yellen in June described the outlook for productivity growth as a “key uncertainty for the U.S. economy” that will help determine the future trend for living standards.
“Understanding whether, and by how much, productivity growth will pick up is a crucial part of the economic outlook,” Ms. Yellen said. “But this is a very difficult question, and economists are divided. Some are relatively optimistic, pointing to the continuing pace of innovations that promise revolutionary technologies, from genetically tailored medical therapies to self-driving cars. Others believe that the low-hanging fruit of innovation largely has been picked and that there is simply less scope for further gains.”
She described herself as “cautiously optimistic” but said it “would be helpful to adopt public policies designed to boost productivity,” such as promoting investment.
BLS Report on Productivity and Costs
Let’s now take a look at the BLS Report on Productivity and Costs.
BLS Notes
- Nonfarm business sector labor productivity decreased at a 0.5-percent annual rate during the second quarter of 2016. Output increased 1.2 percent and
hours worked increased 1.8 percent. - From the second quarter of 2015 to the second quarter of 2016, productivity decreased 0.4 percent, the first four-quarter decline in the series since a 0.6-percent decrease in the second quarter of 2013.
- Unit labor costs in the nonfarm business sector increased 2.0 percent in the second quarter of 2016, reflecting a 1.5-percent increase in hourly compensation and a 0.5-percent decline in productivity. Unit labor costs increased 2.1 percent over the last four quarters.
- Manufacturing sector labor productivity decreased 0.2 percent in the second quarter of 2016, as output and hours worked decreased 0.8 percent and 0.7 percent, respectively.
- The concepts, sources, and methods used for the manufacturing output series differ from those used in the business and nonfarm business output series; these output measures are not directly comparable.
Economic Debate
Economists debate why productivity is so weak, but I propose cheap money.
By holding rates so low, the Fed induced a proliferation of stores that have to be stocked, and manned.
Overall sales may be up, but it is spread around on a number of stores rising faster than necessary.
Unit labor costs are up thanks to new minimum wage laws. Higher minimum wages will eventually slow store expansion. Yellen will not like the result.
Mike “Mish” Shedlock
