Productivity Jump in Fourth Quarter 2023

By at 1 February, 2024, 1:43 pm

….Manufacturing Troubles Persist

by Raymond J. Keating –

Productivity is one of those important economic measures that doesn’t get the attention it deserves. After all, labor productivity affects business profitability, worker earnings and economic growth.

In terms of definitions, labor productivity is output per hour, and is arrived at by dividing an index of real output by an index of hours worked by all workers, including employees, owners, and unpaid family workers. When looking at labor productivity numbers, the sweet spot is hit when both real output and hours worked grow, but output grows faster than hours worked.

According to the latest report from the U.S. Bureau of Economic Analysis, nonfarm business labor productivity jumped by 3.2 percent in the fourth quarter (on a seasonally adjusted annualized rate). That resulted from a 3.7 percent increase in real output and 0.4 percent gain in hours worked.

As for all of 2023, nonfarm business labor productivity increased by 1.2 percent in 2023. Real output grew by 2.6 percent, while hours worked were up by 1.3 percent. That was a welcome shift into positive territory after a decline of 1.9 percent in 2022. The -1.9 percent for 2022 resulted from a real output gain of 2.1 percent being outdistanced by an increase of 4.0 percent in hours worked.

It must be noted that productivity has under-performed since the onset of the Great Recession (end of 2007 to mid-2009). From 1948 to 2006, for example, the average annual increase in nonfarm business labor productivity registered 2.3 percent, but from 2007 to 2023, the average was 1.5 percent. This slowdown in productivity growth coincided with the slowdown in real GDP growth experienced since 2007 as well.

Finally, it must be noted that the gain in manufacturing productivity in the fourth quarter was anything but positive because the 2.3 percent increase resulted from a combination of a decline of 2.4 percent in real output and a decline of 4.6 percent in hours worked. For all of 2023, manufacturing productivity fell by 0.8 percent, with real out down by 0.5 percent while hours worked were up by 0.3 percent.

There’s always a great deal of talk in political circles about the state of manufacturing and how to best to help the manufacturing sector – which, by the way, is overwhelmingly populated by small businesses, with 93.4 percent of manufacturers having fewer than 100 employees (according to latest Census Bureau data for 2021). In recent years, we’ve heard about industrial policies whereby politicians dole out subsidies to their favorite manufacturers; imposing tariffs on imports to protect manufacturers; or the need for a weaker dollar. But none of that makes any economic sense.

Industrial policy wastes tax dollars and subsidizes politically-favored endeavors, and often failures. Tariffs and a weaker dollar actually increase the costs of imports that serve as inputs to U.S. manufacturers, with dollar devaluation also undermining incentives to invest in the U.S.

If serious about helping U.S. manufacturing, then the answers are straightforward: Reduce tax and regulatory burdens on starting up, building and investing in businesses, and reduce costs and expand opportunities by advancing free trade. That’s a positive agenda for all businesses, including manufacturers.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.


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