Productivity rates for nonfarm businesses in the U.S. increased by 2.9% in the third quarter according to data that was just released by the Bureau of Labor Statistics. This was the largest gain in two years. For the year to date, overall productivity has increased 1.5% which compares quite favorably to the 0.7% rise that was registered for all of 2011. Productivity is defined as the output per hour of all persons employed by companies in this sector.
The manufacturing sector is a subset of the nonfarm business sector, but here the news has not been so good in recent months. Manufacturing productivity for the U.S. declined by 0.7% in Q3. This marked the second consecutive quarterly decline following a large jump that was posted in the first quarter of this year. For the year to date, productivity has increased by 1.6% which is noticeably lower than the 2.5% gain in 2011.
At the present time, I am not too concerned by the two straight quarters of negative productivity for manufacturers. All of the uncertainty of the past six months has created a less-than-favorable business climate in the U.S., and this is having a negative effect on the manufacturing sector. But if the trend of slowing productivity persists, then we should all get worried.
Consistent increases in the level of productivity are necessary if the U.S. is going to achieve its goal of rising incomes and low inflation over the long run. Higher productivity rates mean that the US labor force is becoming increasingly competitive. In recent years, the overall productivity in the U.S. has increased faster than compensation levels have. This has resulted in large corporate profits. Under normal circumstances, a large portion of these profits would be re-invested in new equipment and new employees. This may yet happen as soon as Congress finds a solution to the problem of the “fiscal cliff.”
I have stated it many times in the past, and I will continue to say it in the future: productivity growth should be the top priority for policymakers in Washington. Productivity growth is the only way that a country with a growing population can consistently achieve rising prosperity for its citizens. We can reform the tax code and the entitlement programs all we want, and both reforms are desperately needed to be sure. But if we do not continue to become more productive, none of these reforms will matter because we will not be able to buy any kind of government services anyway.