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Economy in Brief

U.S. Worker Productivity Growth Up, Unit Costs Ease
by Tom Moeller February 5, 2009

During last year's fourth quarter, labor productivity in the nonfarm business sector rose 3.2% (AR), up sharply from a 1.5% increase during 3Q. The rise pulled growth for the whole year up to 2.8% which doubled the gain during all of 2007. The rise far outpaced Consensus expectations for a 1.2% increase.

As workers became more productive last quarter, that raised the growth in compensation to 5.0%. Year-to-year, however, the rise failed to translate into faster growth in worker pay. Growth in compensation per hour in fact decelerated last year to 3.4% which was the slowest since 1997.

The drop in compensation growth was the result of the recession. It lowered output by 5.5% during 4Q and growth for the full year to 1.0% from 2.0% in 2007 and from 3.2% in 2006. Hours worked fell by more, thus lifting productivity. They fell at an 8.4% rate last quarter and 1.8% for the full year.

The acceleration in productivity growth dropped the quarterly increase in unit labor costs to 1.8%. For the full year, the 0.5% gain in unit labor costs was the weakest in five years.

In the factory sector, however, the story was different. Productivity declined at a 3.0% rate which was near the rate of decline during the prior two quarters. For the year as a whole factory sector productivity did rise 1.3%. However, that only about matched the 2006 increase which was down sharply from a 4.9% rise in 2005 and gains of 6% to 7% in 2002 and 2003. Unit labor cost growth in the factory sector thus surged last quarter at a 13.3% rate and it rose at a quickened 2.5% rate for the year.

Nonfarm Business Sector (SAAR, %) 4Q '08 3Q '08 Y/Y 2008 2007 2006
Output per Hour 3.2 1.5 2.7 2.8 1.4 1.0
Compensation per Hour 5.0 4.2 3.5 3.4 4.1 3.8
Unit Labor Costs 1.8 2.6 0.7 0.5 2.7 2.8
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