Productivity Declines in 2Q2011: Historically Normal

Second quarter 2011 Non-farm business sector labor productivity has been revised downward from -0.3% (news here) to -0.7% (annualized).  The talking heads are warning doom and gloom, but productivity declines can also be a reversion to mean.  

The data and charts (see above) as presented in the news release would seem to indicate a recessionary pattern, but looking at productivity long term – no recessionary relationship to productivity can be seen.

If there was a relationship, the USA would be in its 29th recession since 1960.  The reality is that productivity improvements come in waves.

Is a productivity decline good? – it is never good, but the reality is that we have been in a period where productivity improvements have been above the mean.  I do, however, add this as a sign on the recession side of the ledger, as productivity falls coming into a recession.  On its own, productivity cannot be used to indicate a recession is coming.

The headlines from the press release:

Nonfarm business sector labor productivity decreased at a 0.7 percent annual rate during the second quarter of 2011, the U.S. Bureau of Labor Statistics reported today, with output and hours worked rising 1.3 percent and 2.0 percent, respectively. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the second quarter of 2010 to the second quarter of 2011, output increased 2.4 percent while hours rose 1.6 percent, yielding an increase in productivity of 0.7 percent. (See chart 1)

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.

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