Weekly Economic Trends and Indicators

The Headline:

U.S. nonfarm business labor productivity growth was revised downward for the first quarter from 0.8% to 0.3%. Labor productivity growth in the manufacturing sector was revised downward from 3.6% to 3.2%. The revision in nonfarm business productivity was due to lower output growth than the original estimate. The revision in manufacturing was due to both lower output growth in nondurable manufacturing and a smaller decline in hours worked overall (both durable and nondurable goods) than the original estimate.

The Details:

Despite the downward revision, overall labor productivity growth is within its range of the last three years. With only a handful of exceptions, quarterly labor productivity growth has ranged between 0 at 5% over the last ten years.

The productivity picture in manufacturing is more complicated. Employment in manufacturing nationwide contracted nearly 30% from 2000 to 2010 (from 17 million to 12 million employees) while output remained mostly flat. By definition, this meant a rise in productivity growth, in this case, led by automation making it possible to produce the same output with fewer workers.

Since 2010, however, the decline in manufacturing employment stopped and reversed slightly while output has (except for during and after recessions) fluctuated in a narrow range. As a result, manufacturing productivity has been much more volatile than overall nonfarm business productivity.

The Context:

The coming decline in labor force participation due to the aging population in the U.S. poses a challenge to all sectors of the economy, but manufacturing may experience this squeeze sooner and more acutely. For output to continue to increase alongside a smaller labor force, productivity must increase. Two decades ago, technological advances made this possible. Today, AI is being touted as the next revolution. However, AI adoption is not yet widespread in manufacturing.

A new survey has been introduced by the U.S. Census Bureau called the Business Trends and Outlook Survey. This survey now tracks the adoption of AI across all sectors and has been cited in recent research on productivity and AI. In manufacturing, about 12% of firms surveyed from November through February responded that they recently used AI in some function of their business. However, this was mostly in functions such as sales, legal, and business development. Only 2% of manufacturers surveyed used AI in production in the last six months. Yet 15% of manufacturers surveyed expect to use AI in production in the next six months. We may be at the very beginning of the steep portion of the adoption curve as more manufacturers see the value of AI in production. As a result, the manufacturing labor force of the future will require a new set of skills for working with AI.

Next week: Inflation update