Written by Steven Hansen
A simple summary of this release is that the rate of productivity growth has been gently growing year-over-year , whilst the rate of growth of labor costs is undergoing a growth spurt. Overall, the year-over-year increase of unit labor costs had remained moderate since the Great Recession.
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 2.0% in the fourth quarter of 2012. The market was expecting a decrease of 1.2% to 1.5%. However, if data is analyzed in year-over-year fashion, productivity has been gently improving since the 1Q2011.
Unit labor costs (non-farm business) increased at an annual rate of 4.5% in the 4Q2012 (1.1% year-over-year) with the market expecting an increase of 2.4% to 3.0%. Taken at face value, the headlines are saying that productivity is down while costs have increased.
Although one could argue that productivity improvement must be cost effective, it is not true that all cost improvement are productivity improvements.
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.
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.
Seasonally Adjusted Year-over-Year Change in Output of Business Sector
But the output per person has been growing in 2012 after two years “less good”track (negative second derivative).
Seasonally Adjusted Year-over-Year Change of Output per Hour
All this is happening while costs per unit produced remain subdued even after growing this month:
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 2.0 percent annual rate during the fourth quarter of 2012, the U.S. Bureau of Labor Statistics reported today. The decrease in productivity reflects increases of 0.1 percent in output and 2.2 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the fourth quarter of 2011 to the fourth quarter of 2012, productivity increased 0.6 percent as output and hours worked rose 2.4 percent and 1.8 percent, respectively. Annual average productivity increased 1.0 percent from 2011 to 2012.
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 4.5 percent in the fourth quarter of 2012, the combined effect of the 2.0 percent decrease in productivity and a 2.4 percent increase in hourly compensation. Unit labor costs rose 1.9 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 0.5 percent in the fourth quarter of 2012, as output increased 0.7 percent and hours increased 0.1 percent. Productivity increased 1.6 percent in the durable goods sector and decreased 0.5 percent in the nondurable goods sector. Over the last four quarters, manufacturing productivity increased 1.3 percent, as output increased 2.8 percent and hours worked rose 1.5 percent. Unit labor costs in manufacturing increased 0.4 percent in the fourth quarter of 2012 and increased 3.4 percent from the same quarter a year ago.
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.