Written by Steven Hansen

A simple summary of this release is that the rate of productivity growth is down , whilst the rate of growth of labor costs is skyrocketing. However, historically preliminary reports are seldom more than wild guesses which are significantly revised.

The headlines annualize quarterly results (Econintersect uses year-over-year change in our analysis). Based on preliminary data, the Bureau of Labor Statistics reported that non-farm business productivity decreased at an annual rate of 1.7% in the first quarter of 2014. The market was expecting -1.8% to -0.5% productivity growth (consensus -1.2%). If data is analyzed in year-over-year fashion, productivity was up 3.3% year-over-year.

Unit labor costs (non-farm business) increased at an annual rate of 4.2% in the 1Q2014 (decreased 1.1% year-over-year) with the market expecting 1.2% to 4.3% (consensus 2.8%). 

Although one could argue that productivity improvement must be cost effective, it is not true that all cost improvement are productivity improvements. [read more on this statement]

Even though a decrease in productivity to the BLS could be considered an increase in productivity to an industrial engineer, this methodology does track recessions. [The current levels are well above recession territory.

Please note that the following graphs are for a sub-group of the report nonfarm > business. Business sector real productivity is growing (see graph below).

Seasonally Adjusted Year-over-Year Change in Output of Business Sector

And the output per person was better than the last quarter.

Seasonally Adjusted Year-over-Year Change of Output per Hour for the Business Sector

All this is happening while business sector costs per unit also increased.

Seasonally Adjusted Year-over-Year Rate of Change of Unit Labor Costs

The headlines from the press release:

Nonfarm business sector labor productivity decreased at a 1.7 percent annual rate during the first quarter of 2014, the U.S. Bureau of Labor Statistics reported today. The decrease in productivity reflects increases of 0.3 percent in output and 2.0 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the first quarter of 2013 to the first quarter of 2014, productivity increased 1.4 percent as output and hours worked rose 3.2 percent and 1.7 percent, respectively.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers. .

Unit labor costs in nonfarm businesses increased 4.2 percent in the first quarter of 2014, due to both the decline in productivity and a 2.4 percent increase in hourly compensation. Unit labor costs increased 0.9 percent over the last four quarters.

BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.

Manufacturing sector productivity increased 3.3 percent in the first quarter of 2014, as output increased 1.8 percent and hours worked decreased 1.4 percent. (See chart 3.) Productivity increased 3.6 percent in the durable goods sector and increased 2.5 percent in the nondurable goods sector. Over the last four quarters, manufacturing productivity increased 2.2 percent, as output increased 2.4 percent and hours increased 0.2 percent. Unit labor costs in manufacturing increased 0.1 percent in the first quarter of 2014 and declined 0.2 percent from the same quarter a year ago.

preliminary chart:

Caveats Relating to Productivity

Productivity is determined using monetary criteria, and does not recognize outsourced man hours – in other words, if a business cuts half of its workforce by outsourcing a sub-component or sub-service, this would be a 50% productivity improvement.

These productivity measures describe the relationship between real output and the labor time involved in its production. They show the changes from period to period in the amount of goods and services produced per hour. Although these measures relate output to hours at work of all persons engaged in a sector, they do not measure the specific contribution of labor, capital, or any other factor of production. Rather, they reflect the joint effects of many influences, including changes in technology; capital investment; level of output; utilization of capacity, energy, and materials; the organization of production; managerial skill; and the characteristics and effort of the work force.

Econintersect believes a better measure (if you must use monetary tools to tract productivity) would be competitiveness.

Looking at productivity / output long term – output fall below 0% year-over-year change is a good sign that a recession is underway. Another way to look at it – if productivity rate of gain is falling, this could be an indicator a recession is coming.

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