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Economy in Brief

3Q U.S. Productivity Strong
by Tom Moeller November 3, 2005

Growth in non-farm labor productivity of 4.1% last quarter was nearly double the upwardly revised growth during the prior quarter and easily surpassed Consensus expectations for a 2.5% rise. The increase lifted the year on year growth in worker productivity to 3.0%, its strongest since 2Q '04.

Output growth of 4.2% (4.2% y/y) was down slightly from a 4.4% increase during 2Q while hours worked grew a slight 0.1% (1.2% y/y).

The Bureau of labor Statistics indicated that the effects of Hurricanes Katrina & Rita could not be separately identified but that the effects were imbedded in the 3Q figures covering output, hours and compensation.

Unit labor costs fell 0.5%, the first quarterly decline since 2Q '04. The decline stemmed both from the strength in productivity as well as a moderate 3.6% (5.8% y/y) rise in compensation costs which was the slowest since 2Q '04.

The implicit price deflator rose 3.3% (2.9% y/y) and the increase lifted the ratio of prices to unit labor costs to its highest since early last year. During the last ten years there has been a 58% correlation between the ratio and the y/y growth in corporate profits.

Factory sector productivity growth surged 4.5% (4.7% y/y) after a 3.6% rise during 2Q. Manufacturing compensation grew just 2.9% (7.2% y/y) which allowed unit labor costs to fall 1.6% (+2.5% y/y), the first decline since 2Q '04.

Nonfinancial corporate sector productivity growth during 2Q was revised down to 6.3% (6.2% y/y) from 6.8% reported previously. Nevertheless, unit labor costs still fell 2.4% (+0.4% y/y) versus the initial estimate of a 2.6% decline. Output for this measure is gleaned from the income side of the National Income & Product Accounts (NIPA) as opposed to the non-farm output figures which are derived from the output side of the NIPA. Factory sector output is derived from the industrial production measures compiled by the Federal Reserve Board.

Non-farm Business Sector (SAAR) 3Q '05 2Q '05 Y/Y 2004 2003 2002
Output per Hour 4.1% 2.1% 3.0% 3.4% 3.8% 4.0%
Compensation 3.6% 4.0% 5.8% 4.5% 4.0% 3.5%
Unit Labor Costs -0.5% 1.8% 2.7% 1.1% 0.2% -0.5%
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