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Unsettling Details: Largest Jump in Productivity Since 1971

Productivity Jump
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EDITOR NOTE: Yesterday’s Productivity and Costs report was positively received overall as it topped analyst consensus estimates. Productivity came in higher while costs came in lower than anticipated. The author below dissects this data to reveal what most investors missed. His conclusion is that the good news didn’t come unaccompanied by horrible news. As higher-compensated remote employees maintained their hours while low-cost labor remained furloughed, productivity came at a high cost: as a result of work hours decreasing more than output, productivity rose overall. Is this truly a cause for celebration?

Productivity jumped 10.1% in the second quarter, the most since the first quarter of 1971. However, the details are more than a bit unsettling.

Productivity vs Output Disaster

Inquiring minds are diving into the BLS Productivity and Costs Report for the Second Quarter of 2020.

BLS Charts on Productivity

Productivity Good News  and Horrible News

  • Good News: The BLS notes that the 10.1-percent increase in nonfarm business sector labor productivity in the second quarter of 2020 is the largest quarterly increase since the first quarter of 1971, when output per hour increased 12.3 percent.
  • Horrible NewsOutput decreased 37.1 percent and hours worked decreased 42.9 percent

Hours worked decreased more than output so productivity rose.

Hooray?

Unit Labor Costs  

  • Unit labor costs in the nonfarm business sector increased at an annual rate of 9.0 percent in the second quarter of 2020, as a 20.0-percent increase in hourly compensation outpaced the 10.1-percent increase in productivity. Unit labor costs increased 9.6 percent in the first quarter of 2020, and 4.9 percent over the last four quarters.
  • The 20.0-percent increase in hourly compensation in the second quarter of 2020 was the largest increase in the series which begins in 1947. Also, the labor share—defined as the percentage of current-dollar output that accrues to workers in the form of compensation—increased to 59.8 percent in the second quarter of 2020, the highest level since the fourth quarter of 2008 (60.1 percent). 

This sort of sounds like good news (assuming you are not an employer) until you understand what it means. 

Compensation reflects higher-paid employees working from home while lower-paid employees did not work many, if any hours.

Manufacturing Disaster

In contrast to overall productivity up 10.1% manufacturing productivity dropped 14.6 percent annual rate in the second quarter of 2020, as output fell 47.0 percent and hours worked dropped 38.0 percent. 

These were the largest quarterly declines in each of these series, which begin with data for 1987.

Long Term Productivity vs Output

Those charts put a much needed perspective on this alleged jump in productivity.

Originally posted on The Street

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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