The Bureau of Labor Statistics reported that manufacturing productivity fell 0.4 percent in the third quarter. It had been weaker in the second quarter, up just 0.2 percent, mainly from slower output growth. This trend continued into the third quarter, with output shrinking 0.6 percent after growing 1.5 percent in the second quarter and 10.2 percent in the first quarter. The number of hours worked in the third quarter also declined, off 0.2 percent. As a result, unit labor costs for manufacturers rose 1.5 percent.

Breaking these figures down by sector shows that output fell by 1.0 percent for durable goods industries and it was flat for nondurables. The output per hour for all persons (e.g., labor productivity) declined for both, down 0.7 percent and 0.1 percent, respectively. The number of hours worked by durable goods workers declined by 0.4 percent, with nondurable goods employees adding 0.1 percent hours of work in the quarter. Unit labor costs were higher for nondurable goods manufacturers (up 3.0 percent), with durable goods businesses having unit labor costs up 0.9 percent.

For the larger economy, the news was more positive. Nonfarm business labor productivity increased 1.9 percent in the third quarter, the same as was observed in the second quarter. Output grew 3.2 percent, an acceleration from the 2.1 percent growth seen in the second quarter. More importantly, unit labor costs fell 0.1 percent, helping to keep nonfarm businesses more competitive on the labor front.

Overall, the productivity figures highlight what we are seeing in other economic indicators. The nonfarm data show modest growth in output hours worked. This is indeed a positive for the economy as whole, but it contrasts with weaknesses experienced in the manufacturing sector. Manufacturers continue to cite poor sales – particularly on international orders – and uncertainties regarding the fiscal cliff as major challenges. Additionally, production and hiring activity has mostly stalled.

These data confirm that reduced output and employment are forcing labor productivity and competitiveness lower. Until this changes, it will be hard for the larger economy to more fully recover. It is clear that softness in the manufacturing sector is dampening economic growth in the third quarter and moving forward.

Chad Moutray is chief economist, National Association of Manufacturers.

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