Manufacturing’s Productivity Lead Could be Gone

Economy-leading productivity performance – that’s long been one of the biggest advantages domestic manufacturing’s champions have long enjoyed over those who dismiss the sector’s importance. So imagine how disappointed I am to report that, by at least one key measure, that lead is gone.

Late last month, the Labor Department issued its latest report on multi-factor productivity in manufacturing. This broadest measure of efficiency is different from and much less current than the labor productivity figures that come out each quarter, because many more inputs are studied. Moreover, detailed data take even longer to issue – which is why these new manufacturing numbers only take us through 2013. It’s also crucial to keep in mind that productivity is one of the most difficult concepts economists study, and in fact, there’s a lively debate taking place right now about whether the government data are significantly understating America’s performance.

Nonetheless, the new figures, which also revise the 2011 and 2012 readings, are unmistakably bad news both for manufacturing itself and for the broader economy it helps undergird.

According to the new report, multi-factor productivity in manufacturing actually fell in absolute terms in 2013 – by 0.7 percent. Even worse, 2011’s previously stated 0.5 percent drop is now pegged at a decrease of 1.4 percent, and 2012’s 0.6 percent gain has turned into a 0.8 percent decline. As a result, multi-factor productivity in manufacturing has dropped for the last three years for which data is available, and for four of the last five years. (It shot up by 3.7 percent during the recovery year 2010.)

The three straight annual declines are manufacturing’s first such swoon on the multi-factor productivity front since the turn of the 1990s, when this measure of efficiency decreased for four years in a row (1989 through 1992). From that point through 2009, when the Great Recession was bottoming, multi-factor productivity in manufacturing dipped only once – in the 2001 recession year. Since mid-2009, however, the U.S. economy has been in expansion mode, at least according to the quasi-official National Bureau of Economic Research. Yet manufacturing’s multi-factor productivity is still looking recessionary.

Domestic industry isn’t only failing in productivity compared to its own history. It’s failing compared with the rest of the economy. Overall U.S. multi-factor productivity (for private non-farm businesses) hasn’t exactly been killing it since the mid-1990s. Since then, its rate of increase has steadily slowed, and for the latest three data years (2012-2014) has settled in the 0.8-0.9 percent annual growth range. But during those years, multi-factor productivity in manufacturing has been down.

As a result, since the last recession began, in 2007 through 2013, productivity for private non-farm business rose by a cumulative 2.95 percent, and then increased by another 0.8 percent in 2014. For manufacturing, it was down by 0.92 percent from 2007-2013. 

The economic conventional wisdom, which doesn’t view any part of the economy as especially important or unimportant, will likely conclude that these developments vindicate its opposition to dedicated government support for manufacturing. Manufacturing’s advocates will need to counter by demonstrating the folly of supposing that the nation’s overall apparent productivity woes can be ended without reinvigorating manufacturing productivity. A great place to start would be dispensing once and for all with the hokum about industry enjoying an historic renaissance – which is now emphatically belied not only by wage and trade figures, but by what we’ve just learned about manufacturing’s productivity.