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Economy in Brief

U.S. Worker Productivity Jumps During 2Q As Trend Improves
by Tom Moeller August 11, 2009

Businesses have managed their businesses well for the weakened economic environment. That's evident in the labor productivity gains during the last three quarters which stand in sharp contrast to the material declines during the economic downturns of the 1950s through the 1980s. Last quarter, improved management of labor costs was evident in a 6.4% (AR) surge in labor productivity in the nonfarm sector. It was the strongest increase since the third quarter of 2003 and the gain beat Consensus expectations for a 5.3% increase. (Revisions to past data incorporate the comprehensive revisions to the National Income & Product Accounts (NIPA) data that were reported on July 31st. )

Cuts to employment & hours-worked came in the face of a sharp output decline which totaled a record 5.6% y/y. As evident in the recent GDP report, last quarter the quarterly rate of business sector output decline slowed to 1.7% from 8.8% during 1Q. Nevertheless, businesses continued to cut employment & hours worked sharply; at a 7.6% annual rate after a 9.0% drop during 1Q.ยท Compensation costs weakened substantially with the recession. They barely rose at a 0.2% rate after the 2.4% 1Q decline. These weak figures combined with downward revisions to earlier data leave the y/y increase at just 1.3% which continues the downtrend from roughly 4.0% growth back to 2001.

Last quarter, the surge in productivity and the moderation in labor cost growth combined to drop unit labor costs. The 5.8% q/q decline was the second in a row and lowered the y/y change to -0.6%, the first negative reading since early-2004.

Nowhere was the productivity improvement more evident last quarter than in the factory sector. Worker productivity rose 5.3% which was the first quarterly increase in over one year. Output fell at a 9.9% rate (-15.0%) while hours worked dropped at a 14.4% rate (-13.9%). The benefit to workers was seen in a 5.8% rise in 2Q compensation. That rise lifted to y/y growth to 6.0% which was its strongest since 2003. The combination of strong productivity and strong compensation kept the quarterly increase in unit labor cost at just 0.5%. However, year-to-year, growth of 7.4% y/y is a multiple of last year's 2.2% growth.

The productivity & cost figures are available in Haver's USECON database.

Investing over the life cycle with the long-run labor income risk from the Federal Reserve Bank of Chicago can be found here. 

Nonfarm Business Sector (SAAR, %) 2Q '09 1Q '08 Y/Y 2008 2007 2006
Output per Hour 6.4 0.3 1.8 1.8 1.9 0.9
Compensation per Hour 1.2 -2.4 1.3 2.8 4.2 3.8
Unit Labor Costs -5.8 -2.7 -0.6 1.0 2.3 2.8
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