Weekly Economic Trends and Indicators

The Headline:

Earlier this month, the Bureau of Labor Statistics (BLS) reported that nonfarm business sector labor productivity increased by a seasonally adjusted annual rate of 3.2% in the fourth quarter of 2023. For the year, nonfarm business sector productivity increased by 1.2%.

Manufacturing sector labor productivity increased 2.3% in the fourth quarter but declined by 0.8% for the year. Hours worked in manufacturing fell by 4.6% in the fourth quarter—the largest drop since the second quarter of 2020.

The Details:

Labor productivity is defined as output per hour of labor. In percentage terms, this is calculated as the difference between the growth rates of output and hours worked. Hence, an increase in labor productivity means that output is growing faster than hours worked. Labor productivity can increase even if output is decreasing if the number of hours worked is decreasing faster.

That is exactly what happened in manufacturing in the last quarter. Output fell by 2.4%. However, hours worked decreased by 4.6%. (Note that because of seasonal adjustment and rounding the change in labor productivity may not exactly equal the difference between the growth of output and hours.)

In 2023, overall labor productivity was close to the recent average of 1.6% growth since the fourth quarter of 2019. Output growth increased in both 2022 and 2023 by over 2%, but hours worked grew more slowly in 2023 than in 2022.

The Context:

Earlier this month, while discussing the employment figures, I mentioned that “Productivity growth is critical to prolonging the expansion,” while also noting that not all sectors of the economy are moving together.

Productivity statistics show that for both the quarter and the year, manufacturing productivity grew more slowly than productivity in the rest of the economy. This agrees with the other data we have tracked over the last few months regarding manufacturing both locally and nationally.

Manufacturing labor growth slowed markedly in 2023 both locally and nationally as the impact of higher interest rates continues to be felt. Despite these headwinds, manufacturing productivity was above the recent average in the fourth quarter. While manufacturing output fell slightly, consumer demand is still strong enough to keep output from sinking too far.

Recently, some commentators have remarked that manufacturing is showing signs of turning upward again. For this month's Quarterly Market Report, the Chamber surveyed local businesses, including manufacturers, and asked them how they would assess the recent past and their expectations of the next six months. Read the full report for the details.

Strong productivity growth is critical because it effectively “raises the speed limit” on the economy. That is, when productivity is increasing, the risk that strong GDP growth will reignite inflation is lessened. This was a key ingredient of the “soft landing” in the late 90s.

Next week: Census data for the Quad Cities area