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Fascinating New Study On Productivity

NBER has published a fascinating new study by Enghin Atalay, Ali Hortaçsu, Nicole Kimmel, and Chad Syverson. The study questions the prevailing narrative that there has been a recent slowdown in manufacturing productivity.

Their contention is that part of what we’ve been calling a “manufacturing productivity slump” is really a measurement problem. Here is their argument, in non-economist terms: if you compare what households pay (consumer price indexes) to what factories receive (producer price indexes and import prices), you see systematic gaps in fast-moving, tech-heavy goods. If you push those gaps through the input–output structure of the economy, you find out that official statistics understate productivity in much of manufacturing, but especially in computers and electronics. After correcting for this, the authors find that manufacturing productivity has been growing since the late 2000s, albeit more slowly than in the 1997–2009 heyday.

Because consumer series devote more resources to quality adjustment, which are known as hedonic methods, the consumer price of a rapidly improving product should fall faster than the producer price. When that happens across many categories, it suggests we’re undervaluing real output and therefore understating productivity on the producer side. The television example is hard to ignore. Between 1997 and 2023, the PCE price index for televisions fell by roughly 15.4% per year, while the corresponding producer-side deflator for audio and video equipment fell only about 1.1% per year; even import prices declined only about 3.0% annually once those data begin in 2005. That spread is not a one-off: other consumer electronics show similar patterns. In short, we’re capturing dramatic quality-adjusted price declines in the consumer data that barely register in producer statistics.

Scale that pattern across the consumption basket and you see why the headline results are novel. The study estimates that producer-side indexes overstate durable-goods inflation by about 2.6 percentage points on average, precisely where technological progress is fastest. Using the BEA’s input–output tables to map those mismeasurement wedges onto industries, the authors back out how much TFP growth has been missed. They find the understatement is concentrated in durable manufacturing: roughly 1.7 percentage points per year overall, and an eye-catching 5.7 points in computer and electronic products (NAICS 334). Nondurable manufacturing is understated by around 0.4 points; non-manufacturing is basically a wash.

What happens to the time series once you correct for this? Manufacturing still slows after 2009, but it does not flatline. The authors’ adjustments imply true manufacturing TFP grew about 0.6% per year from 2009 to 2023, with durables running near 1.9% and nondurables roughly flat. That is slower than the 1997–2009 era, but meaningfully stronger than the official data imply—and much closer to the rest of the private economy.  

Should we trust it? The internal logic is sound. BLS explicitly applies hedonic methods to dozens of CPI categories, including many with rapid innovation, but to only three PPI categories: computers, microprocessors, and broadband. That asymmetry is exactly where the paper finds the largest gaps. The authors run sensitivity checks that go against their own result—such as folding wholesale/retail/transport margins into the producer-side inflation measure—and the basic finding holds, with ICT-heavy goods driving most of the understatement. They also note alternative explanations (for example, different inflation paths for business-facing versus consumer-facing models within a product code) and show why these are unlikely to overturn the main result. This is careful work, even if it is necessarily indirect.

There are limits. The adjustment raises the level of manufacturing productivity and changes its composition; it does not erase the post-2009 slowdown. In fact, the authors are explicit that their corrections cannot explain why growth downshifted after the Great Recession; they only show that, even in the slower phase, productivity continued to advance once you measure it properly. That admission, to my mind, strengthens credibility rather than weakens it.

If the study is right that tech-heavy durables have been quietly delivering more productivity than our factory-gate statistics show, then a Hamiltonian strategy should move from apology to acceleration. This is not an argument for laissez-faire; it is a signal that targeted manufacturing is a high-return national investment. Electronics, electrical equipment, precision machinery—the very sectors central to defence, energy, and critical supply chains—are stronger and more dynamic than the scorekeepers suggest. That makes them the right beachhead for reshoring, and it means an American System agenda can be more ambitious about shifting production home without fearing a collapse in efficiency.

Start with market access. We should hard-wire reciprocity and resilience into the tariff and trade-remedy regime, with sectoral rates that rise automatically when import surges threaten capacity in strategic durables. Close the de minimis loophole that allows a river of small parcels to bypass customs. Tighten and enforce rules of origin so that “North American” really means continental value added. Pair this with domestic-content floors—not just in defence but across infrastructure, energy, health, and federal IT—so that public demand creates a stable home market for advanced components and subassemblies. If consumer-side prices capture quality gains better than producer indexes, then procurement should reward verifiable performance and domestic value added, not the lowest nominal bid for foreign kit.

Finance is the next bottleneck. Create a true industrial finance arm—call it an American Development Bank—mandated to provide long-dated, patient capital to scale plants in semiconductors, power electronics, machine tools, medical devices, and the inputs they rely on. Couple that with production tax credits that vest only when firms hit milestones for domestic content, export performance to non-adversarial markets, and apprenticeship hours. Combine place-based deals—cheap, reliable power; accelerated site permitting; modernized ports and rail spurs—with clawbacks if firms off-shore within a set window. The measurement result here matters: if official stats undercount productivity in these sectors, the social return on crowding-in private investment is likely higher than budget scorers will show. Build anyway, and update the scoring rules.

A jobs strategy has to be production-first. Stand up regional training compacts led by employers in electronics and precision manufacturing; fund paid apprenticeships and credentialing tied to specific product lines; and preference bids from firms that commit to multi-year training cohorts. Tighten critical-skills visas to what is truly scarce on the shop floor and in engineering teams, while raising the cost of labour arbitrage that hollows out domestic capability. Wage gains come from productivity and bargaining position; reshoring strategic capacity delivers both.

Finally, aim squarely at the trade deficit. Import substitution in durables with rising quality is the cleanest path, but do not ignore the exchange-rate channel and capital flows. The administration should be prepared to counter persistent currency undervaluation by mercantilist partners with reciprocal tariffs or market-access fees, and to use “surge” safeguards swiftly when deficits widen in targeted lines. Export promotion should be tactical—focused on goods that deepen scale economies in the same plants that serve the home market—rather than a general subsidy to move product at any price.

Measurement still matters, but as a governor on the throttle, not a brake. Direct BLS and BEA to extend hedonic methods to producer indexes in innovation-intensive goods, publish a “producer quality” supplement that reconciles consumer and producer prices, and feed those corrections into budget scoring and trade-remedy triggers. The deeper point is strategic: if America’s most security-relevant manufacturers are more productive than we’ve been told, then the case for a muscular American System—protection where needed, disciplined industrial finance, and demand shaped by national priorities—gets stronger. Use the finding to calibrate the tools, then press them hard.

Policy News You Need To Know

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READER POLL: Actually: should we do a "Quote of the Day" section, alongside the Chart of the Day and Meme of the Day? Write to us with your thoughts!

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