Manufacturing Productivity Growth Rate In U.S. Slows

Although productivity growth in U.S. manufacturing advanced at a respectable seasonally adjusted annual rate of 3.9% from January through March of this year, that figure was significantly below the 6.3% growth rate during the final quarter of 2004. Productivity is a measure of output per hour worked.

Output among U.S. manufacturers increased 3.3% during the first quarter of 2005 and hours worked fell seven-tenths percent, marking the fourth consecutive quarter that output in manufacturing has risen and hours have fallen, the U.S. Labor Department reported on May 5.

As output increased 5.8% and hours decreased four-tenths of a percent, productivity increased at a 6.3% rate among durable goods manufacturers, the makers of airplanes, autos and appliances whose products are designed to last more than three years. Productivity grew a much-slower 1.3% among producers of durable goods, as output increased just three-tenths of a percentage point and hours fell 1%.

In the broader nonfarm business sector of the U.S. economy, which includes manufacturing, productivity increased at a 2.6% annual rate during the first quarter of this year, as output grew 3.6% and hours increased 1%.

"As expected, the manufacturing sector's more solid 3.9% productivity increase outpaced the rest of the economy," says a pleased David Huether, chief economist at the National Association of Manufacturers, Washington, D.C. "In fact, my analysis shows that manufacturing has accounted for roughly 30% of our overall economy's productivity gains during the last 15 years," he relates. "If manufacturing maintains this impressive pace of productivity gains, we could begin to see more sizable increases in industrial employment later this year as our economy works past its current, high-energy-price-induced soft patch."

Meanwhile, Merrill Lynch & Co.'s economists note "less welcome news" that unit labor costs in the nonfarm business sector grew 2.2% during the first quarter, up from 1.7% in the final quarter of 2004. Nevertheless, they seem to be adopting a phrase from the iconic "Hitchhiker's Guide to the Galaxy": Don't Panic. "While unit labor costs were on the high side, we don't expect this to mark the beginning of a trend since the slowdown in economic growth on the horizon will keep a lid on compensation," Merrill says.

Unit labor costs in manufacturing grew nine-tenths of a percent during the first quarter, just slightly above their eight-tenths gain in the final quarter of 2004 and, figures the NAM's Huether, "about two-thirds slower than the prior six months."

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