View From the Bleachers : The Economy's Productivity

On June 3, 2021, the Department of Labor’s Bureau of Labor Statistics (BLS) released the revised Productivity and Costs analysis of the First Quarter of 2021. Loosening of pandemic restrictions has started to release pent-up demand which, in turn, caused 1^st quarter output to jump significantly. After last year’s massive downsizing, the first leg of the ramp-up is where productivity should be near a peak.

A reminder:

Productivity is determined by dividing output by hours worked.

Unit Labor Costs (ULC) is the ratio hourly compensation to labor productivity. Increases in productivity offset increases in compensation and vice versa.

Productivity Data- 1^st Quarter 2021

Item	Overall Economy	Non-Financial Corp	Manufacturing
Productivity
Overall	5.4%	5.8%	-1.7%
Output	8.6	8.8	1.4
Hours Worked	3.0	2.8	3.1
Last 4 Quarters		6.5	1.8

Unit Labor Cost (ULC)
Overall	1.7%	-4.7%	10.7%
Hourly Compensation	7.2		8.9
Productivity	5.4		-1.7
Last 4 Quarters	4.1	18.8	5.1

The chart above highlights some information from the 1Q2021 Productivity Report. The output for the overall economy grew at a good pace (8.6%), given the times, and it did so with a good productivity level. ULC for the same period gets interesting. Hourly compensation was up 7.2%, high enough to start to worry. The 5.4% productivity increase mitigated the overall effect. But note that over the last four quarters, the ULC has risen at a faster clip. In the Non-Financial sector of the economy, we see those same strong gains in output and productivity as in the overall economy. The ULC for the sector for the last four quarters is 18.8% higher! That’s a warning shot. Manufacturing productivity suffered a drop of 1.7% while the ULC increased a considerable 10.7%.

From the bleachers, it looks like the non-manufacturing sectors of our economy have had a pretty good first quarter. The manufacturing sector is stumbling over hurdles as it tries to ramp up. Poor productivity and a rising ULC appear as signs of the need for accelerated investment in plant & equipment so producers can further leverage labor hours with productivity gains. If manufacturers can straighten productivity out, the oncoming ramp-up demand for goods will see good productivity gains with the additional output.