US productivity drop: return to bad old '70s?

Americans' work hours were cut 8 percent, the largest quarterly drop since 1975.

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    A Chrysler employee assembles cars in Sterling Heights, Mich. Manufacturing workers saw their overall hours cut 14.2 percent in the fourth quarter of 2008 (compared with the third quarter).
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In an unusual twist for this recession, Americans in the fourth quarter were not able to squeeze out more work while spending fewer hours on the job.

That's a negative sign for the economy because productivity can keep a moderate recession from becoming a severe one, warns Casey Mulligan, an economist at the University of Chicago.

The productivity revisions released Thursday by the Bureau of Labor Statistics is setting off alarm bells.

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A 0.4 percent drop

For the first three quarters of this recession, productivity did rise. But in the fourth quarter of 2008, it fell 0.4 percent from the previous quarter, the new revisions show. The whopping 8.4 percent decline in output was the largest in nearly 27 years (since the first quarter of 1982); the 8.0 percent fall in hours was the biggest in nearly 34 years (since the first quarter of 1975).

If it continues, it would take us back to the bad old recessions of the 1970s and 1980s, Mr. Mulligan writes in a blog post. Back then, layoffs made the workers who remained on the job less productive.

Since the 1990s, layoffs have allowed remaining workers to be at least as productive (and, in the 2001 recession, more productive). "A slight decline is bad news because productivity ought to rise when employment falls," he writes.

Trouble in factories

Manufacturing productivity was hit especially hard in the fourth quarter, with output (-17.7 percent), hours (-14.2 percent), and productivity (-4.0 percent) all falling by record numbers since the BLS began tracking manufacturing specifically in 1987.

"Today's report bodes ill for the jobs market," Nariman Behravesh, chief economist of IHS Global Insight, said in a release. Employers are having to fire workers but are not seeing their unit labor costs decline.

Typically, productivity goes up in recessions because businesses trim their staffs and then demand more output from their remaining workers.

Despite the quarterly decline, annual productivity for 2008 remained a positive 2.7 percent, unchanged from last month's previous estimate, largely because the BLS revised the third-quarter figures upward.

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