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Economy in Brief

U.S. Productivity Little Revised, Compensation Lowered Sharply
by Tom Moeller December 5, 2006

For 3Q '06, nonfarm labor productivity growth of 0.2% was little revised from the preliminary report. The figure fell short of Consensus expectations for a larger revision to 0.4% growth. The weak increase kept y/y growth in productivity at 1.4%, the weakest since 1997.

Compensation per hour, however, was revised sharply with the 3Q estimate taken down one percentage point to 2.6% growth. Combined with a huge downward revision to 2Q growth to -1.2% from +6.6% (not a typo) it lowered the y/y change to 4.3% which is on a par with the growth during the last several years.

The revisions to compensation lowered unit labor costs sharply as well to 2.3% growth last quarter. Growth during 2Q was lowered to -2.4% versus a previously estimated 5.4% gain. During the last thirty years there has been an 85% correlation between labor cost growth the growth in the GDP chain price deflator, although that correlation has fallen sharply in recent years.

Factory sector productivity growth last quarter was increased to 6.7% (4.5% y/y) from 5.9% but growth in factory sector compensation per hour was lowered just slightly to 2.4% (2.4% y/y) from 2.9%. The y/y gain in compensation is collapsed versus the previous estimate because of a sharp revision to 2Q growth to -5.8% (2.4% y/y) from +4.0% estimated last month. Unit labor costs as a result fell 4.1% during the third quarter (-2.0% y/y) after an 8.3% decline during the prior period.

Reported for the first time were 3Q estimates for the nonfinancial corporate sector. Productivity there rebounded 5.6% (3.8% y/y) after a 4.3% drop during 2Q that previously was reported as a 0.2% increase. Compensation grew 2.8% (4.3% y/y) after a 0.7% decline that was earlier estimated at +6.5%. As a result, unit labor costs fell 2.7% (+0.5% y/y) last quarter.

Unit profits for the nonfinancial corporate sector in this productivity report in fact grew 27.6% (19.0% y/y). These figures are in line with the sharp 8.2% (25.8% y/y) gain in nonfinancial corporate profits reported in last week's GDP report. Prices for the sector grew just 0.2% (1.8% y/y), the slowest quarterly increase in four years.

U.S. Economic Outlook is last Friday's speech by Chicago Fed president Michael H. Moskow and it can be found here.

Non-farm Business Sector (SAAR) 3Q '06 (Revised) 3Q '06 2Q' 06 Y/Y 2005 2004 2003
Output per Hour 0.2% 0.0% 1.2% 1.4% 2.3% 3.0% 3.7%
Compensation per Hour 2.6% 3.7% -1.2% 4.3% 4.4% 3.6% 4.0%
Unit Labor Costs 2.3% 3.8% -2.4% 2.9% 2.0% 0.7% 0.3%
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