Productivity and Unit Labor Costs Rise in the Second Quarter

By Robert Hughes

Productivity, or output per hour, for the nonfarm business sector increased 0.9 percent at an annual rate in the second quarter, up from a 0.1 percent pace in the first quarter. Over the past four quarters, productivity increased 1.2 percent. Productivity is the magic bullet that helps restrain cost pressures and drives living standards over the long term.

Also in today’s report, nonfarm business output increased 3.4 percent in the second quarter while hours worked increased 2.5 percent and hourly compensation rose 1.6 percent. Combining these elements, unit labor costs rose a modest 0.6 percent in the quarter and are down 0.2 percent from a year ago.

Measures for the manufacturing sector can be broken down. Productivity in the manufacturing sector at large rose 2.5 percent in the second quarter, led by a 3.8 percent rise for durable-goods manufacturing, while nondurable-goods manufacturing productivity fell 0.1 percent. Over the past year, durable-goods manufacturing productivity is up 1.3 percent while nondurable-goods productivity is up just 0.6 percent. Historically, manufacturing industries tend to have strong rates of productivity growth.

For manufacturing overall, output rose 1.6 percent for the quarter while hours fell 0.9 percent and compensation gained 2.2 percent. Together, these resulted in a 0.3 percent decline in unit labor costs in the quarter. Since 1987, unit labor costs for manufacturing have been essentially flat, rising at a 0.04 percent annualized rate. Over that period, durable-manufacturing ULCs are down 0.4 percent annualized while nondurable-manufacturing ULCs have risen 1.1 percent annualized.

Maintaining healthy rates of productivity growth is critical for the economy and for individual companies. Competitive pressures combined with rising wages are likely to provide an incentive for businesses to continue to invest capital to boost productivity. That incentive along with solid growth in cash flow and profits should result in further gains in capital-goods orders and production in the months and quarters ahead.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.