Worker Productivity Finally Back in the Right Direction

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After having been in the dumps for far too long, we are seeing a long overdue surge in worker productivity. Nonfarm productivity rose by a sharp 3.1% on an annualized basis during the third quarter. Even the dismal −0.6% reading for productivity in the second quarter was revised to just −0.2%.

Bloomberg had the consensus estimate calling for a 2.2% rise in the third quarter, but the Econoday range was set at 1.6% to 2.8% for the third quarter. This means that the productivity report was better than every single economist had predicted.

Prior to the third quarter ramp up, productivity had witnessed three consecutive quarters of declining productivity, which was one of the worst streaks seen in many years. From the third quarter of 2015 to the third quarter of 2016, productivity was unchanged.

Unit labor costs had been rising handily as well, a function of wage inflation and the cost of benefits, but that mellowed during the third quarter and was revised lower in the second quarter. Unit labor costs rose just 0.3% in the third quarter, more than a point lower than the Bloomberg consensus estimate of 1.4%. This 0.3% gain in labor costs was also under all expectations as the Econoday range called for a gain of 0.7% on the lower bar to a gain of 1.5% on the high bar. Second-quarter unit labor costs were revised to a gain of 3.9% from the prior 4.3% reading, still very robust.

The driving force for third-quarter productivity was a surge in output coupled by the lower labor cost gain. Productivity gains more than doubled to 3.4%. Before thinking this was just lower wages, there was a drop in the hours worked component growth, falling to a gain of just 0.3% from a 1.7% gain in the second quarter.

Some of this report will confirm last week’s higher reading on gross domestic product (GDP), and it is still, all in all, positive for the jobs market. It might not be as robust from the labor stance, but it is still an improvement nonetheless.

According to the Bureau of Labor Statistics (BLS), labor productivity is effectively the rate of output per hour worked. It is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors and unpaid family workers. The BLS calculates unit labor costs as the ratio of hourly compensation to labor productivity. Increases in hourly compensation tend to increase unit labor costs, and increases in output per hour tend to reduce them.

The BLS showed the following add-on data for the productivity and labor costs report:

  • Manufacturing sector labor productivity increased 1.0 percent in the third quarter of 2016, as output and hours worked increased 1.1 percent and 0.1 percent, respectively.
  • Output per hour increased 2.5 percent in the durable goods manufacturing sector, the combined effect of a 1.9-percent increase in output and a 0.6-percent decline in hours worked.
  • Productivity decreased 1.1 percent in the nondurable goods sector in the third quarter of 2016, following a 4.6-percent second-quarter decrease.
  • Over the last four quarters, manufacturing sector productivity increased 0.2 percent, as output was unchanged and hours worked declined 0.1 percent.
  • Unit labor costs in manufacturing increased 2.2 percent in the third quarter of 2016 and rose 2.9 percent from the same quarter a year ago.
  • Hourly compensation increased 3.2 percent in the third quarter of 2016.