Worker productivity saw its biggest drop since 1947 in the first quarter—but experts say the headline figures don’t tell the whole story
American workers’ productivity dropped sharply in the first quarter of 2022, notching the largest three-month decline since 1947.
Non-farm productivity, which measures worker output against hours worked, sank 7.5% from January through March, the Bureau of Labor Statistics reported on Thursday.
Even as overall hours worked increased 5.5%, output from the average American worker dropped 2.4%.
At the same time, business unit labor costs—how much an average business pays its workers to produce one unit of output—increased 11.6%, the most since 1982, as hourly compensation rose 3.2%.
But experts say the productivity drop wasn’t due to Americans taking more coffee breaks or phoning it in at work. The poor numbers were really a result of a 1.4% decline in Gross Domestic Product (GDP) in the first quarter.
“The key thing is productivity is actually measured by taking GDP and dividing it by hours worked. And GDP was freaking weird in the first quarter,” Heidi Shierholz, the president of the Economic Policy Institute, told Fortune. “If you dig into the GDP numbers, you actually see healthy growth, but the top-line GDP numbers are negative because of a decline in inventories and an increase in imports, which has nothing to do with workers becoming less productive.”
Shierholz argued that at least a portion of the productivity decline seen in the first quarter can be attributed to strong jobs growth in sectors that are considered by economists to be “low productivity jobs.”
The Obama administration economist noted that in March and April of 2020, when the U.S. economy shed millions of restaurant jobs due to COVID-19, productivity spiked, but that spike was a result of the loss of jobs that, on average, are lower productivity—workers didn’t simply start increasing their output.
“Now, we’re seeing strong growth in these lower productivity jobs. So that’s been a background effect over the course of this recovery driving productivity lower,” Shierholz said, adding that “lower productivity” is a technical term used by economists and has nothing to do with how hard people work.
Still, the drop in worker productivity flies in the face of Bureau of Labor Statistics estimates for an average annual productivity jump of 1.7% from 2020 to 2030. It also surpassed Wall Street analysts’ expectations for a 5.4% decline in productivity and a 9.9% rise in labor costs this quarter.
There were some bright spots in the Thursday report, however. Manufacturing sector labor productivity increased 0.7% in the first quarter of 2022, as output jumped 5.7% and hours worked rose 5.1%.
Chad Moutray, the chief economist for the National Association of Manufacturers, told Fortune that the manufacturing sector has been incredibly resilient in the face of a slew of headwinds, including four-decade high inflation, the war in Ukraine, and ongoing supply chain challenges that have only been exacerbated by lockdowns in China.
“We just keep getting hit, one after another, with a lot of challenges, but the sector continues to just plug along,” Moutray said, adding that he’s not “overly worried” about productivity growth moving forward.
He noted that one of the bright spots in GDP data continues to be so-called “fixed investment,” or companies spending on new equipment, intellectual property, and other assets that help drive productivity gains.
“Companies are making smart investments today that are going to pay dividends down the line,” Moutray said. “And I think the longer-term trend is going to be positive for productivity, not just for manufacturers but for the overall economy.”
Moutray urged investors to look beyond current volatility, and argued we will likely see rising productivity growth in coming quarters.
The economists did note that there are some “red flags” that he will be watching moving forward, including if the Federal Reserve is able to ensure a soft landing for the U.S. economy as it raises interest rates, and how the war in Ukraine plays out.
“Manufacturing continues to be resilient, that doesn’t mean they’ll always be resilient, right?” he said. “We’re not immune to slowing global growth. But throughout much of the challenges we’ve seen over the last year or so, there’s been a surprising amount of resilience there.”
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