The Bureau of Labor Statistics reported that labor productivity eased somewhat in the manufacturing sector, up 2.7 percent in the second quarter versus 3.9 percent in the first quarter. Both of these figures, however, exceed the averages of the past years, with labor productivity in the sector up 1.0 percent and 1.8 percent, respectively, in 2011 and 2012. One of the larger challenges with the second quarter data was the slowdown in manufacturing output, which rose just 0.1 percent from the quarter before. As a result, unit labor costs for the sector increased 1.4 percent as compensation costs exceeded the gains in labor productivity. Ideally, we would like to see negative unit labor costs, as this helps us become more competitive globally.
Labor productivity gains were larger in the durable goods sector than for nondurable goods, up 4.5 percent versus 0.7 percent. Along those lines, the data were generally better for durable goods firms on net. Output in the durable goods sector was up 1.5 percent, and unit labor costs rose 0.1 percent on real compensation gains of 4.6 percent. In contrast, nondurable goods output declined 1.5 percent in the second quarter and real compensation was up by 3.5 percent. This pushed unit labor costs for nondurable goods firms up 2.8 percent.
Note that unit labor cost comparisons with the fourth quarter of 2012 and the first quarter of 2013 are somewhat difficult, as noted in June’s revision of first quarter productivity data. The compensation data in those two quarters were impacted by shifts in income due to the fiscal cliff, with accelerated payouts of dividends and bonuses at year’s end inflating compensation in the fourth quarter. The large swing higher in the fourth quarter was then met with a large swing down in the first, making the unit labor cost information more difficult to interpret, both for manufacturers and other businesses.
Turning to the larger economy, nonfarm labor productivity rose 0.9 percent in the second quarter. This follows declines of 1.7 percent each in both of the past two quarters. As such, this was a positive development. Nonfarm output rose 2.6 percent, with unit labor costs up by 1.4 percent. Overall, this data is good, but still not great. The modest gains in labor productivity in the second quarter were better than the 0.5 percent gains of 2011, but they remain below the 2012 average of 1.5 percent.
Chad Moutray is the chief economist, National Association of Manufacturers.