Conventional measures suggest that US manufacturing productivity has stagnated over the past 15 years. In Why Is Manufacturing Productivity Growth So Low? (NBER Working Paper 34264) Enghin Atalay, Ali Hortaçsu, Nicole Kimmel, and Chad Syverson challenge this finding and suggest changes to the calculation methodology. 

The Bureau of Labor Statistics (BLS) total factor productivity index for manufacturing increased by 1.2 percent per year between 1987 and 2009, outpacing the 0.9 percent growth rate for the overall economy. But the pattern flipped from 2009 to 2023 when the annual growth rate of manufacturing productivity fell slightly and the overall economy maintained a 0.8 percent annual growth rate. Manufacturing’s apparent stagnation is of particular significance because its quality gains tend to spill over to the larger economy. 

The BLS relies on producer-facing price indices, gross output deflators, and import price indices when distinguishing between price increases attributable to quality improvements and those due to inflation. The researchers contend that in manufacturing, producer-facing indices fail to fully capture quality improvements. The Personal Consumption Expenditures (PCE) Price Index, which is largely derived from the Consumer Price Index, identifies quality changes in many more product categories and may be a better gauge for estimating productivity growth.

The gap between the PCE Price Index and the producer-facing indices is most pronounced for durable goods, which have benefited a great deal from quality changes. The average annual price increase is 2.6 percentage points higher when using producer-facing indices than when using the PCE Price Index. The researchers find no such gap between indices in nonmanufacturing sectors of the economy.

Nearly all the manufacturing sector’s productivity growth since 1987 stems from a single subsector: Computer and Electronic Products. Televisions are an example of a product in this subsector. Between 1997 and 2023, the average price change was –15.4 percent per year, according to the PCE Price Index, but only –3.0 percent as measured in the producer-facing price indices.

The researchers correct for productivity mismeasurement through a series of calculations involving input and output prices. They find that annual growth is most understated in the Computer and Electronic Products subsector. Their estimate is 5.7 percentage points per year above the conventional measure. For the durable goods sector, their estimate is 1.6 percentage points higher. For nondurable manufacturing, it is 0.5 percentage point per year higher. For the overall manufacturing sector, the researchers continue to find a decline in growth, but at higher levels. They estimate that the growth rate fell from 2.2 percent between 1997 and 2009 to 0.6 percent between 2009 and 2023.  

                                                                                                                                  - Steve Maas

Chad Syverson gratefully acknowledges support from Smith Richardson Foundation grant 20233172.