📊 Total Factor Productivity in the U.S. Economy: 2024 Report Summary

Total Factor Productivity (TFP) is a key measure of economic efficiency, capturing how well the U.S. economy transforms inputs—like labor, capital, and intermediate goods—into output. Unlike labor productivity, which only considers output per hour worked, TFP reflects the combined effects of technological change, improved management, workforce skills, and other efficiency gains that are not directly measured by input growth. Here’s a comprehensive summary of the latest TFP report, focusing on the most recent data and long-term trends in the United States.

What is Total Factor Productivity?

  • 🧮 TFP measures the efficiency with which all inputs (labor, capital, energy, materials, and services) are used together to produce output.
  • 📈 It is calculated by dividing an index of real output by an index of combined inputs.
  • ⚙️ TFP growth reflects improvements not just from more inputs, but from better use of those inputs—such as technological advances, better management, and organizational changes.

Key Findings from the 2024 TFP Report

  1. Overall TFP Growth in 2024
    • 📈 TFP in the private nonfarm business sector increased by 1.3% in 2024.
    • 🏭 Output rose by 2.9%, while combined inputs (capital and labor) increased by 1.6%.
    • 🏦 Capital input grew by 2.9%, and labor input (hours worked plus labor composition) increased by 0.7%.
    • This marks two consecutive years of TFP growth, returning to a pattern similar to the pre-pandemic year of 2019.
  2. Industry-Level Trends
    • 🏪 TFP increased in 13 out of 21 major industries, led by retail trade and agriculture, forestry, fishing, and hunting.
    • 📚 The educational services industry saw the largest output increase (12.4%) and combined input growth (11.0%), mainly driven by intermediate inputs.
    • 🏭 Output grew in 15 of 21 major industries, with most also seeing increased combined inputs.
  3. Business Cycle Perspective (2019–2024)
    • 🔄 Over the current business cycle, TFP grew by 0.9% per year in the private nonfarm business sector.
    • This outpaced the previous cycle (2007–2019), which saw 0.6% annual TFP growth.
    • Output and combined input growth were both higher in the 2019–2024 period compared to the previous cycle.
  4. Manufacturing Sector Insights (2022 Data)
    • ⚠️ TFP fell in 66 of 86 detailed manufacturing industries in 2022, reflecting ongoing volatility from the COVID-19 pandemic.
    • 📉 Durable manufacturing saw declines in 38 of 51 industries; nondurable manufacturing declined in 28 of 35.
    • 🏆 However, some industries posted strong TFP gains, such as glass and glass products (+13.1%), animal slaughtering and processing (+9.3%), and communications equipment (+8.3%).
    • 🚗 Among the largest manufacturing industries, animal slaughtering and processing, aerospace products and parts, motor vehicle parts, and semiconductors/electronic components saw TFP increases.
  5. Components of TFP Growth
    • 🛠️ TFP growth is driven by factors not directly measured by input growth, such as:
      • Technological change
      • Returns to scale
      • Workforce skill improvements
      • Better management and organizational practices
    • These factors are crucial for long-term economic growth and competitiveness.
  6. TFP and Labor Productivity
    • 👷 Labor productivity (output per hour worked) increased by 2.7% in 2024, the largest annual growth since 2004 (excluding post-recession rebounds).
    • TFP contributed 1.3 percentage points to this growth, with capital intensity (1.1 points) and labor composition also making positive contributions.
    • In manufacturing, substitution of intermediate inputs for labor was a leading source of labor productivity growth over the long term.

Long-Term Trends and Cyclical Patterns

  • 📅 TFP growth tends to be higher during economic expansions and lower during recessions.
  • For example, the number of manufacturing industries with TFP growth peaked in years following recessions (1992, 2003, 2010, 2021).
  • Conversely, TFP growth was limited during recession years (1991, 2001, 2009, 2020).

Why Does TFP Matter for the U.S. Economy?

  • 💡 TFP is a primary driver of sustainable economic growth, as it reflects improvements in how resources are used, not just increases in resource use.
  • 📊 Higher TFP means the economy can grow faster without requiring more labor or capital, helping to raise living standards and maintain competitiveness.
  • 🏆 Policymakers and economists watch TFP closely to gauge the underlying health and potential of the U.S. economy.

Summary

The 2024 Total Factor Productivity report shows that the U.S. economy is regaining efficiency, with TFP rising 1.3% in the private nonfarm business sector. This growth is broad-based, with gains in most major industries, especially retail trade and agriculture. The manufacturing sector remains mixed, with some industries excelling and others lagging, reflecting ongoing adjustments after the pandemic. TFP growth is essential for long-term economic health, as it captures the benefits of innovation, better management, and smarter use of resources. For anyone interested in the U.S. economy’s future, tracking TFP is crucial.

References: 

Total Factor Productivity, US Bureau of Labor Statistics

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