Productivity 1Q2013 (Preliminary): Productivity Grows Faster than Costs

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A simple summary of this release is that the rate of productivity growth is up , whilst the rate of growth of labor costs is down. Overall, comparing one year ago – productivity is growing faster than costs.

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 increased at an annual rate of 0.7% in the first quarter of 2013. The market was expecting an increase of 1.2% to 1.5%. 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 at an annual rate of 0.5% in the 1Q2013 (0.6% year-over-year) with the market expecting an increase of 1.6% to 2.5%.

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 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.

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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Comment Note by reader Roger Erickson:

Of course it does. That’s why we’re still here. That equation has to be true of every surviving system that is still growing.
Jumping to the inevitable conclusion, our culture is going nowhere if the gains from productivity growth are not ploughed into methods for parsing the unpredictable outcomes of Option Recombination.

All of biology has settled on full Sexual Recombination. Natural Selection – to win an Adaptive Race – STARTS with selection & culling by context, but ACCELERATES with self-selection & self-tuning, from diversity-based resiliency. Evolution can’t occur if diversity-based-resiliency doesn’t chase context reality.

What we call human culture is simply one of many organized methods for accelerating natural selection.

Selection on a cultural scale (using Cultural Selection, diversity-based internal resiliency) requires INVESTING in Cultural Recombination, i.e. generating a robust middle class.

We cannot predict where recombinant capabilities will arise. We pursue massively parallel recombination to generate it. The only way to accelerate discovery of unpredictably distributed personal/cultural capabilities is to invest in the distributed selection engine. Hint, it’s called a @#$%^&! Middle Class.

This ain’t Rocket Science. Just invest in a vibrant middle class, or kiss your vaunted culture good day.