Supply chain managers face productivity challenges

As Americans prepare for the long Labor Day weekend, supply chain managers may wish to consider how they can regain some measure of lost productivity in the fall.

“Major U.S. manufacturers have been trying to do too much with too little in the workforce,” said IHS economist, Patrick Newport. “Hiring is obviously needed, but there’s still the underlying concern that the economy has not hit bottom.”

The U.S. Department of Labor’s Bureau of Labor Statistics, noted today that the nonfarm business sector labor productivity in the second quarter was revised down to -0.7 percent (previously -0.3 percent). A downward revision to output accounted for the downgrade.

Other observations shared by IHS are these:

• Year-on-year, productivity is growing only 0.7 percent.
• Unit labor costs for the nonfarm business sector, the second key number in this release, increased 3.3 percent during the quarter (previously 2.2 percent). Over the past four quarters, unit labor costs rose 1.9 percent, the fastest year-over-year rate since the fourth quarter of 2008.
• Manufacturing productivity fell 1.5 percent during the second quarter (previously -2.0 percent).
• Productivity in the nonfinancial corporate sector in the first quarter increased 2.3 percent (previously 1.4 percent). In the second quarter, productivity in this sector was up a whopping 4.4 percent, with the output index up 7.5 percent and the hours index up 3.0 percent.

The revisions do not alter the underlying story, economists told SCMR. Productivity is still dropping. Wage inflation is climbing, but remains low.

“Why is productivity dropping? Several explanations come to mind, but at this point, it is hard to say with certainty,” said Newport.

He said one reason might be that that new hiring in the private sector is slowing the workflow, since it takes time and staff to train new employees. Another is that the existing employees, “worked to the bone,” is spent. The run up in commodity prices earlier this year and the Japanese earthquake, which created inefficiencies throughout the economy, have probably also played roles. A fourth possibility—that the numbers are just wrong—should not be discounted. Productivity numbers get revised many times over several years before they get etched in stone.

Meanwhile, wage inflation is inching up, but remains low. Unit labor costs were running at a 1.9 percent year-on-year rate in the second quarter. A year ago, they were dropping at a 2.5 percent rate. The deflation threat is distant, and there are no signs that wage inflation is nearby.

Manufacturing productivity, output and unit labor costs were revised back to 1987. Productivity growth in manufacturing for 2007-2010 was revised up from 1.6 percent to 2.0 percent, as a result.

“The near term outlook for productivity is not promising,” said Newport. “We expect its growth to remain sluggish—mostly below 1.0 percent over the next eight quarters. Over the past 50 years, productivity averaged 2.1 percent.”

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