Like it or not, investors have to remain aware of all sorts of new information as it becomes available. Economic data reports, in particular, have the potential to move markets, especially if they bring unexpected news to the analysts who try to predict every facet of the economy. We've already examined the reports for gross domestic product, factory orders, employment, and consumer prices. Now let's focus on a less quantitative aspect of economic activity: the Bureau of Labor Statistics' report on productivity.
The figures released by the BLS express a qualitative concept that few other measurements of economic activity attempt to define. This article looks further at how productivity is measured, and the implications it has on the overall economy.
The basic concept
In general, the productivity figures provided by the BLS attempt to measure how much economic activity takes place on average within a fixed period of time. If employees working a standard 40-hour work week are able to accomplish more in one week than they were the week before, they've been more productive.
The BLS measures productivity by referring to two other sets of data. To measure overall economic output, the BLS refers to gross domestic product (GDP) data released by the Bureau of Economic Analysis, filtering out government expenditures and the revenues and expenses of charities and other nonprofit institutions to include only the contributions made by private businesses. The BLS gets the second set of relevant data, which measures total labor levels within the economy, largely from figures used in the monthly employment report.
To calculate productivity, the BLS simply divides total economic output by the number of hours worked. The BLS also provides numbers that reflect certain subsets of the economy, including all non-farm businesses, the manufacturing industry, and separate breakouts for manufacturers of durable goods and nondurable goods. Information on non-financial corporations is also calculated, but this information is not available until subsequent revisions to the initial preliminary report are made.
Why productivity matters
Increasing productivity is essential to economic growth. Although the number of available workers in the economy tends to increase over time, because of population increases and continuing immigration, growth levels that exceed the rate of population increase must result either from higher productivity or from more hours of labor per worker. Conversely, productivity increases can result either from greater levels of overall output, or from reductions in the amount of labor performed by workers.
Productivity figures have increased dramatically in recent years. Between 1995 and 2004, the rate at which productivity rose was roughly double that between 1975 and 1995. Many economists attribute the bulk of these productivity gains to advances in technology, accompanied by falling prices. When top-of-the-line computers cost tens of thousands of dollars each, the incentive to automate certain work functions was relatively small. However, with manufacturers like Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ) now offering powerful computers and other technology equipment for hundreds of dollars, it's a lot easier for companies to justify spending money on technology that enables workers to do more work faster and more efficiently. Although economists point to continuing innovation within the technology sector, which may continue to support increased productivity, it's possible that population trends and physical limitations to technological improvements may force productivity gains to slow in the future.
Looking at breakdowns of historical productivity by industry, it's interesting to note that over the past 20 years, productivity gains have been highest in the production of commercial equipment, electric goods, electronics, and electronic shopping and mail-order outlets. These advances clearly reflect the boom in technology and Internet-related sales by online retailers like Amazon.com (NASDAQ:AMZN). On the other hand, the food and beverage industry has suffered from low productivity gains, and even losses in a few areas. Grocery stores, restaurants, and drinking establishments all have gained relatively little from the overall economy's increasing productivity.
The figures released yesterday indicated flat productivity levels for the overall economy, which amplified concern about an impending recession. However, looking more closely at the report, the manufacturing sector bucked the overall trend, with sharply rising productivity and lower labor costs.
Investors can use productivity numbers to identify industries that make the best use of available labor, capital, and equipment to maximize output. Businesses with more productive workers generally outperform their rivals, and often create new ways of doing business that their counterparts cannot follow. Similarly, by comparing U.S. productivity figures with those of other countries, investors can identify attractive geographic areas for international investment.
In summary, productivity figures released by the BLS provide a rare look at the quality of economic activity within the economy. Keeping track of changes in productivity levels can give you an indication of the sustainability of economic growth that other types of economic data can't duplicate.
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Fool contributor Dan Caplinger has found his personal productivity continuing to skyrocket as 2006 draws to a close. He doesn't own shares of any of the companies mentioned in this article. The Fool's disclosure policy is always productive.
