Productivity 1Q2012 (Final): Decline Downwardly Revised

Written by Steven Hansen

One almost needs to begin with the caveats at the end of this post, as productivity is in the eye of the beholder.  My view of productivity is one of an industrial engineer, while the Bureau of Labor Statistics (BLS) are bean counters using a simple hours vs output approach.

Although one could argue that productivity improvement must be cost effective, it is not true that all cost improvement are productivity improvements.

[Note: what follows is a markup of the preliminary data post]

Based on preliminary final data, the Bureau of Labor Statistics reported that non-farm business productivity decreased at an annual rate of 0.5% 0.9% in the first quarter of 2012. The market was expecting between -0.5% and -0.6% a decrease of 0.8%. However, if data is analyzed in year-over-year fashion, output is flat as shown on the graphs below.

Unit labor costs (non-farm business) increased at an annual rate of 2.0% 1.3% with the market expecting an increase of 3.0% 2.2% to 2.3%.

Even though a decrease in productivity to the BLS would be considered an increase in productivity to an industrial engineer (see caveats below), this methodology does track recessions. The current levels are well above recession territory.

Total Output continues to rise:

But the output per person is on a two year “less good”track (negative second derivative).

All this is happening while costs per unit produced remain subdued [graphic is now showing a very steep rise in unit labor costs]:

The headlines from the press release:

Nonfarm business sector labor productivity decreased at a 0.5 0.9 percent annual rate during the first quarter of 2012, the U.S. Bureau of Labor Statistics reported today. The decline in productivity reflects increases of 2.7 2.4 percent in output and 3.2 3.3 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the first quarter of 2011 to the first quarter of 2012, productivity increased 0.5 0.4 percent as output and hours worked rose 2.8 2.7 percent and 2.2 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 2.0 1.3 percent in the first quarter of 2012, while hourly compensation increased 1.5 0.4 percent. Unit labor costs rose 2.1 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 rose 5.9 5.2 percent in the first quarter of 2012, as output grew 10.8 10.0 percent and hours worked increased 4.6 percent. The increases in productivity and output were the largest since the second quarter of 2010. Over the last four quarters, manufacturing sector productivity increased 2.5 2.3 percent [note: the following text was added in the final report] , as output increased 5.3 percent and hours rose 2.9 percent—the largest four-quarter increase in hours worked since the first quarter of 1997 (3.0 percent). Manufacturing hourly compensation declined 0.7 percent from the first quarter of 2011 to the first quarter of 2012—the first four-quarter decline in the measure. Real hourly compensation fell 3.4 percent over the last four quarters, the largest decline in the measure, which begins in the first quarter of 1988.

Unit labor costs in manufacturing fell 4.2 4.9 percent in the first quarter of 2012 and decreased 1.3 2.9 percent from the same quarter a year ago. (See tables A and 3.)

Preliminary fourth quarter and annual 2011 first-quarter 2012 measures were announced today for the nonfinancial corporate sector. Productivity increased 3.7 percent in the fourth quarter of 2011, as output grew faster than hours worked. Annual average productivity for the nonfinancial corporate sector increased 0.4 percent in 2011. Productivity increased 0.3 percent in the first quarter of 2012, as output and hours rose 3.8 percent and 3.5 percent, respectively.

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.

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