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Economy in Brief

U.S. Productivity Rebounded in Q3 But Still Subpar
by Sandy Batten  November 3, 2022

• Nonfarm business productivity edged up 0.3% q/q saar following outsized declines in both Q1 and Q2.

• Compensation growth slowed but remained relatively strong.

• Unit labor cost growth also slowed but was still elevated.

Nonfarm business sector productivity edged up 0.3% q/q saar (-1.4% y/y) following quarterly declines of 4.1% (not revised) and 5.9% (revised up from -7.4%) in Q2 and Q1, respectively. The Action Economics Forecast Survey had expected a 0.5% quarterly gain. This is the third consecutive decline from a year ago, the first time this has occurred since 1982.

The modest rebound in productivity reflected a 2.8% q/q saar increase in nonfarm business output in Q3 (+1.9% y/y) after a 1.2% decline in Q2. Hours worked rose 2.4% q/q (+3.4% y/y) in Q3 after a 2.9% rise in Q2.

Hourly compensation growth slowed to 3.8% q/q saar (+4.7% y/y) in Q3 from 4.5% in Q2. A historically tight labor market (with openings still well in excess of the number unemployed) continues to put upward pressure on wages. A 3.6% increase has been expected in the Action Economics survey. Despite the elevated growth in compensation, it has failed to keep up with the acceleration in inflation with real compensation per hour falling 1.7% q/q in Q3, though this was an improvement from a 5.5% q/q decline in Q2.

With the slight rebound in productivity and the slowdown in compensation growth, unit labor costs (labor cost per unit of output) also slowed. Unit labor costs increased 3.5% q/q in Q3, down from an 8.9% quarterly surge in Q2. However, the 6.1% y/y increase was still the third highest in the past 40 years, though down markedly from 7.6% on Q2. The Action Economics survey had expected a 4.1% q/q saar gain.

In the manufacturing sector, output per hour fell 1.3% q/q saar in Q3 after having risen 2.9% in Q2 as a 1.9% q/q increase in output was exceeded by a 3.3% rise in hours worked. Hourly compensation increased 2.4%, leading to a 3.8% rise in manufacturing unit labor costs.

This release contained benchmark revisions back to 2017. In general, revisions to productivity growth were relatively small, averaging less than plus/minus 0.1%-point in each year except 2020. Productivity growth in the lockdown quarter (Q2 2020) was revised significantly higher (17.9% versus 10.3%) owing to a large upward revision to output and a large downward revision to hours worked.

The productivity and labor cost data are available in Haver's USECON database. The expectations figures are in the AS1REPNA database.

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