Productivity 1Q2013 (Final): Labor Cost Now Growing Faster Than Productivity

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[Note: This post is a markup of the preliminary data post, and the significant difference is that there was a major revision to labor costs in 4Q2012 and 1Q2013]

A simple summary of this release comparing 4Q2012 and 1Q2013 is that the rate of productivity growth is up , whilst the rate of growth of labor costs is contracting. But comparing one year ago – costs are growing faster than productivity.

The headlines annualize quarterly results (Econintersect uses year-over-year change in this analysis). Based on preliminary data , the Bureau of Labor Statistics reported that non-farm business productivity increased at an annual rate of 0.7% 0.5% in the first quarter of 2013 (quarter-over-quarter). The market was expecting an increase of 1.2% to 1.5% 0.5% to 1.1%. However, if data is analyzed in year-over-year fashion, productivity has been gently improving since the 1Q2011 – up 0.9% year-over-year.

Unit labor costs (non-farm business) increased decreased between 4Q2012 and 1Q2013 at an annual rate of 0.5% -4.3% in the 1Q2013 (0.6% 1.1% year-over-year) with the market expecting an increase of 1.6% to 2.5% 0.6% quarter-over-quarter.

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 since the beginning of 2012 after two years “less good” track (negative second derivative).

Seasonally Adjusted Year-over-Year Change of Output per Hour

Costs per unit produced remain subdued:

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

The headlines from the preliminary press release:

Nonfarm business sector labor productivity increased at a 0.7 percent annual rate during the first quarter of 2013, the U.S. Bureau of Labor Statistics reported today. The increase in productivity reflects increases of 2.5 percent in output and 1.8 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the first quarter of 2012 to the first quarter of 2013, productivity increased 0.9 percent as output and hours worked increased 2.5 percent and 1.5 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 0.5 percent in the first quarter of 2013, as an increase in hourly compensation was greater than the increase in productivity. Unit labor costs rose 0.6 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 3.8 percent in the first quarter of 2013, as output grew 5.6 percent and hours rose 1.7 percent. Output growth was robust in both manufacturing subsectors, while virtually all hours growth occurred in durable manufacturing. Over the last four quarters, manufacturing sector productivity increased 1.7 percent as output and hours worked rose 2.6 percent and 0.9 percent, respectively. Unit labor costs in manufacturing decreased 0.5 percent in the first quarter of 2013 and increased 1.6 percent from the same quarter a year ago.

Headlines from the final release:

Nonfarm business sector labor productivity increased at a 0.5 percent annual rate during the first quarter of 2013, the U.S. Bureau of Labor Statistics reported today. The increase in productivity reflects increases of 2.1 percent in output and 1.6 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the first quarter of 2012 to the first quarter of 2013, productivity increased 0.9 percent as output and hours worked increased 2.4 percent and 1.5 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 fell 4.3 percent in the first quarter of 2013, the combined effect of a 3.8 percent decrease in hourly compensation and the 0.5 percent increase in productivity. The decline in hourly compensation is the largest in the series, which begins in 1947. However, over the last four quarters hourly compensation increased 2.0 percent and unit labor costs rose 1.1 percent.

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 3.5 percent in the first quarter of 2013, as output rose 5.3 percent and hours worked increased 1.8 percent. In the durable and nondurable manufacturing sectors, productivity increased 3.5 percent and 3.9 percent, respectively. From the first quarter of 2012 to the first quarter of 2013, manufacturing sector productivity rose 1.6 percent as output grew 2.5 percent and hours rose 0.9 percent. Unit labor costs in manufacturing decreased 10.0 percent in the first quarter of 2013, due to both the 3.5 percent increase in productivity and a 6.9 percent decrease in hourly compensation. Over the last four quarters, hourly compensation increased 4.5 percent and unit labor costs increased 2.8 percent.

Preliminary:

Final:

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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