Quarterly Productivity Gain at 4 Year High as Unit Labor Costs Shrink in Third Quarter - Good News for Fed and Inflation

Higher productivity in the third quarter pushed down gains in unit labor costs to negative territory. Third quarter productivity rose to +4.9% (consensus +3.2%) versus a revised lower +2.2% in the second quarter. This was the strongest reading in four years, and is a positive sign for employee efficiency. The gain was due to faster GDP growth (+3.9%) combined with slower employment growth during the quarter. Manufacturing productivity gains almost doubled from the second to third quarters, rising from 2.4% to 4.6%. Over the past year, productivity has risen 2.4%,to the strongest annual pace since early 2005. Last year, productivity only grew 1% YoY, the smallest increase since 1995. The trend has been for decreasing productivity gains since they peaked at 4.1% in 2002.

Unit labor costs (ULC) fell -.2% (consensus +1%), down from +2.2% in the second quarter. This was the first decrease in ULC in the past year, and is a good sign for containing inflationary pressures. Compensation per hour rose at +4.7% in the third quarter, down from +4.4% in the second quarter. Adjusted for inflation, real compensation rose +2.7%.

Over the past year, productivity rose 2.4% versus .7% the prior quarter. Output rose 2.9% YoY while hours worked only grew +.5%. Compensation per hour rose 6.7% YoY from 5.9% YoY the prior quarter, while real compensation grew +4.3% YoY. Unit labor costs also grew +4.3% YoY. The price deflator rose 1.4% YoY, down from 5.1% in the second quarter.

Warning - Most analysts don't expect these improvements to persist, especially if the economy slows as expected.