Nutty Manufacturing Productivity Statistics

Posted by: Michael Mandel on October 22

This morning the BLS released its “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2008”. And guess what? According to the BLS, the U.S. manufacturing sector had the fastest productivity growth in the world in 2008—1.2%, tied with South Korea. Meanwhile, Japan, Canada, Germany, France and Japan all had manufacturing productivity declines.

Good news for the U.S.? Nope. Remember that the U.S. manufacturing productivity stats are not adjusted for offshoring. That is, when a U.S. manufacturer starts buying or making parts overseas, rather than making them at home, domestic factory employment drops. However, the BLS stats can still report the same output. The result? A reported rise in productivity.

[Added 11/1/2009: As David Martin correctly points out in his comment, the international manufacturing productivity comparisons from the BLS actually use the BEA value-added measure. My mistake, my apologies. However, in two cover stories and various other stories, I’ve spent a lot of time explaining why the BEA manufacturing measure *also* significantly understates the impact of offshoring, because import prices are mismeasured.]

I ask you—with manufacturing productivity dropping around the world, is it more likely that the U.S. is one of the few countries where manufacturing productivity is rising? Or is it more likely that our view of the U.S., with the biggest goods imports in the world, is being warped by a statistical mirage?

2008 increase in manufacturing output per hour
U.S. 1.2%
Korea 1.2%
United Kingdom 0.3%
Germany -0.1%
Japan -0.2%
Taiwan -0.5%
France -0.8%
Canada -2.6%
Sweden -3.7%

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Reader Comments

Lord

October 22, 2009 12:42 PM

Just consider it Chimerica.

CompEng

October 22, 2009 01:53 PM

I agree. Korean offshoring is a big problem!

But seriously, I sometimes wonder if some of these slips are intentional. I keep reading how US manufacturing is going gangbusters at the same time as I read that it's being hollowed out both in terms of jobs and actual capability. It's possible both could be true in different specific industries, but it does seem that most people publishing statistics have some axe to grind and have no problem backing it up with graphs.

oj

October 22, 2009 03:15 PM

It's extremely likely that job cuts have trimmed so much of the fat that productivity is sky-rocketing.

Mike Reardon

October 22, 2009 07:23 PM

2008 is a poor year to focus on, after the Aug-Sept. Crash, Japans exports drop about 15% for Q-4 08, and then again 15% for Q-1 09. Oil prices deflate as the USD remains artificial high thru the crisis. The US auto industry has contraction for most of the year while Japanese take share against them. Only in the last three months does Japans auto production falter.

The high dollar and other supporting things like oil prices falling leave us reacting in some sectors only in Nov-Dec. as the extent impact moves throughout the economy. Flat statistics for 2008, end as trash numbers unless put into context of the dynamic events before and after Aug-Sept 08.

All of that said, yes off-shoring must have its extended impact on the US assembly production systems. It is the major base for parts within retail products made and sold in this country. That remains a constant problem in the balance of trade, because they are integrated fully into our economy.

Scott Alter

October 23, 2009 08:11 AM

Mr. Mandel has one opinion. Here is another.
The auto industry, one of the most resistant to productivity improvements, contracted sharply in 2008. Meanwhile, other small, midsize and even large companies all over the US (many of them our clients) in a feverish struggle to battle the recession, are investing in incremental productivity improvements, cutting headcount and finding ways to keep producing with less labor.
So while the overall GDP looks stagnent, the reality might be that slow change manufacturing in the auto industry is being replaced by higher value small and mid-sized production.
Just a view based on my prospective.

Rycoka

October 23, 2009 06:30 PM

I'm with OJ. Major labour force cuts sound like a good culprit for increased labour productivity.

Ivan Kitov

October 25, 2009 04:11 AM

Quantitatively, OJ is right. Labor force participation rate (LFPR)increased from 58% in 1965 to 67% in 2000. These were years of relatively low rate of productivity growth in the USA, including manufacturing. Since 2000, the LFPR has been falling. In 2008, LFPR=66%, in 2009Q3 LFPR=65.4%, or by 0.6% lower! This very fast drop. but a predicted one: http://mechonomic.blogspot.com/search/label/labor%20force%20participation

The mechanism behind the relative growth in productivity is very simple - the people with the lowermost skills and wages are laid off. The rest has a higher productivity in relative terms.
In the future, the LFPR will be declining in the USA and the productivity will be growing due to shrinking workforce.

The mechanism was described quantitatively two years ago:
Kitov, I., Kitov, O., (2008). The Driving Force of Labor Force Participation in Developed Countries, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 2(3(5)_Fall), pp. 203-222. http://www.jaes.reprograph.ro/articles/3_TheDrivingForceofLaborForceParticipationinDevelopedCountries.pdf

goldcoinsgain

October 27, 2009 07:33 AM

its good to see that the BLS released its "International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2008". Thanks for the great reading, we buygold
bullion in a recession.
I will pass this on to our ira clients to read.

David Martin

October 27, 2009 11:46 AM

Mr. Mandel and the headline writer are both well off the mark. It's much better to ignore them and to go straight to the report, itself, for which you have thoughtfully provided a link. The key statistic one will find there is in the table showing manufacturing employment change 2000-2008 (latest year changes usually get revised later and therefore shouldn't be overemphasized). There you will see a U.S. decline of 3 percent a year, a far higher rate of decline than in previous years and a much faster rate of decline than in the other countries except the UK. That's scary. For what it is worth, the productivity numbers do take offshoring into account. The output figure is value added in the U.S. (see the technical notes); it is not a total mfg. output figure. You pay your journalists to interpret government statistics, not to misinterpret them.

Joe Cushing

October 30, 2009 05:15 PM

I thought productivity always went up in a downturn because companies lay people off and produce less stuff with even less workers. So even though production drops the lay-offs are greater than the production cuts. This is supposed to be the reason why companies are reporting better than expected profits. Are you saying this isn't the case?

Mike Mandel

November 1, 2009 12:22 PM

Joe

Productivity traditionally weakens in the early stages of a recession because companies can't cut workers as fast as production falls. For example, manufacturing productivity growth was negative in 1974 ( the recession started in December 1973).

Mike Mandel

November 1, 2009 12:28 PM

Yowza.

David Martin is right. The international productivity figures use the value-added measure of manufacturing output from the BEA. My apologies.

However--I have already written two long articles explaining why the value-added manufacturing output measure from the BEA *also* undercounts the impact of offshoring. That was "The Real Cost of Offshoring" from 2007 and the sidebar to "Innovation, Interrupted"

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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