Closer Look at Manufacturing Productivity

Beware early claims of positive manufacturing productvity growth. The preliminary second quarter U.S. productivity report shows a strong 5.7% increase in productivity over the previous quarter. When combined with better than expected real GDP growth of 2.4%, it is tempting to conclude that the economy is accelerating while also generating productivity gains characteristic of the new economy. While the productivity release does contain some good news, a closer look reveals troubling evidence that domestic manufacturing’s problems are not yet receding. Why is that? Read on.

One of the frequently mentioned contributors to the jobless recovery has been the unusually high rate of productivity growth since the beginning of the recession. Productivity is currently 10% higher than it was at the start of the recession nine quarters ago. In the past two recessions, productivity was no more than 6% higher at the same point. The second quarter results throw more weight behind this argument, as hours declined while output increased over the first quarter, contributing to the steep 5.7% annualized jump in overall productivity.

The numbers in the report point to the weakness of the labor market, as the gain in nonfarm productivity comes from the combined impact of an increase in output and a decline in hours worked. Implication for ED: don't expect many new jobs in your areas. In fact, hours worked have not increased in any quarter since the beginning of the recession. The manufacturing sector is especially weak as output fell for the fourth quarter in a row, surpassed only by the much faster contraction in hours worked.

What does this mean? The implication for the broader economy is that, as of the second quarter, the decline in the manufacturing sector was not complete, as producers reduced payrolls at a faster pace than the decline in production. Although it is common to see higher than average productivity growth during a recovery before significant numbers of new jobs are added, the persistence of decline in domestic manufacturing is discouraging. Doing more with less, or doing a little less with a lot less, is the manufacturing creed right now.

And now you know the rest of the story on productivity growth.

Click here to read more. (Economy.com requires a subscription however).