Productivity 1Q2012: Output up, Hours Worked Up More

Written by Steven Hansen

Based on preliminary data, the Bureau of Labor Statistics reported that non-farm business productivity decreased at an annual rate of 0.5% in the first quarter of 2012. The market was expecting between -0.5% and -0.6%.  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% with the market expecting an increase of 3.0%.

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 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 percent in output and 3.2 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 percent as output and hours worked rose 2.8 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 percent in the first quarter of 2012, while hourly compensation increased 1.5 percent. Unit labor costs rose 2.1 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 percent in the first quarter of 2012, as output grew 10.8 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 percent. Unit labor costs in manufacturing fell 4.2 percent in the first quarter of 2012 and decreased 1.3 percent from the same quarter a year ago. (See tables A and 3.)

Preliminary fourth quarter and annual 2011 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.

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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