Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. He operates the blog MISH'S Global Economic Trend Analysis and believes in the Austrian School of economics.
The BLS report on preliminary Productivity and Costs, Second Quarter 2017 shows nonfarm business productivity increased 0.9 percent during the second quarter of 2017.
Productivity is defined as “real” inflation-adjusted output divided by aggregate hours worked.
The quarterly number is very good, but revisions were massive and the overall trend is dismal. More importantly, the measurement is FUBAR. First, let’s dive into the report.
Labor Productivity and Unit Costs
Supposedly, the charts are seasonally adjusted, but the second chart on unit labor costs suggests something is seriously wrong. Alternatively, or additionally, there are lots of data-gathering flaws.
In regards to the possibility of data gathering flaws, let’s consider real hourly compensation revisions.
Year-Over-Year Productivity – Real Output Per Hour
The last time year-over-year productivity was up by more than 2.0% was nearly seven years ago!
I downloaded the above data all the way back to 1948 to calculate a long term trend.
Productivity Trend 1948-Present
In 2016, productivity was -0.3% in the first quarter, -0.4% in the second quarter, -0.1% in third quarter and +0.8% in the fourth quarter.
THe BLS notes “Annual Average productivity growth in the nonfarm business sector in 2016 was revised down to a decrease of 0.1 percent.”
This was the first annual productivity decline since 1982.
A Spring 2016 Brookings study asked Is Productivity Slowing or Are We Just Measuring It Wrong?
Here is the Brooking’s conclusion: “Productivity Slowdown is Structural, not a Measurement Problem”.
A Vox report says Productivity is Understated Due to Offshore Profits.
US multinational enterprises may legally shift profits from high tax countries (like the US) to low tax countries (like Bermuda). This column uses unpublished survey data to show how this causes part of the US economic activity generated by these multinational enterprises to be attributed to their overseas affiliates, leading to an understatement of measured US GDP and, in turn, productivity. Profit-shifting activity has increased significantly since the mid-1990s, resulting in an understatement of the growth rate of US productivity.
Lost in the Debate
Before one can measure productivity, one needs to accurately measure hours worked and real output.
Real output implies an accurate measurement of inflation. The term “real” means “inflation-adjusted”.
My Take – Productivity Measurement is Totally “FUBAR”
Totally “FUBAR” Yet Certainly Overstated (Short Synopsis)
Productivity is measured by taking an artificially high estimate of “real” output divided by an underreporting of hours worked.
Despite two artificial boots, the productivity trend still heads lower! Thank the inflation tactics of central banks.
Point 1 discusses Janet Yellen’s preferred measure of labor, was quickly discarded because it did not show what it was expected to show.
Points 2 and 3 discuss the Fed’s puzzlement over inflation. Here’s a hint: They do not know how to measure it.
Points 4 and 5 discuss measures of inflation the Fed does not count, but should.
Mike “Mish” Shedlock