U.S. worker productivity surges as labor costs fall

Recession or expansion, tepid or roaring commerce conditions, there's been one constant in the U.S. economy: Worker productivity continues to increase.

U.S. worker productivity surged at an annualized rate of 9.5 percent in the third quarter, with unit labor costs falling at a 5.2 percent rate, the U.S. Labor Department announced Thursday, as companies increased output even as they continued to trim payrolls. What's more, it was the highest increase in productivity in six years.Economists surveyed by Bloomberg News had expected productivity to increase 6.3 percent and unit labor costs to fall 3.9 percent in Q3. In Q2, productivity increased a revised 6.9 percent and unit labor costs fell a revised 6.1 percent; in Q1, productivity increased 1.6 percent and unit labor costs rose 3.0 percent.

Further, the report indicates how corporate earnings are rising: In Q3 output increased 4.0 percent, but hours worked plummeted 5.0 percent, with real hourly compensation rising just 0.2 percent. That means companies are getting more production out of existing staff.

Large, Yearly Productivity Gains Continue

What's more, the report shows continued, long-term productivity gains amid contained costs. Over the past 12 months, productivity rose 4.3 percent while unit labor costs have declined 3.6 percent -- the largest cost decline since federal government records began for unit labor costs in 1948. The decline in labor costs explains how corporate results could improve despite the recession. That trend should also help keep inflation in check as the U.S. Federal Reserve continues its quantitative easing and low-interest-rate policies to stimulate the U.S. economy.

Another tell-tale stat: manufacturing productivity rocketed 13.6 percent in Q3, while manufacturing unit labor costs plunged 7.1 percent. Manufacturing output increased 7.7 percent despite a 5.2 percent decline in hours worked.

However, investors can still see the effects of the nation's pronounced contraction on the overall economy in the Q3 data. In the past 12 months, output fell 3.5 percent, and hours worked declined a record 7.5 percent.

Productivity measures output per hour worked. Economists say rising productivity usually leads to increases in income, as businesses can increase salaries and wages without increasing their per unit costs. While quarterly productivity statistics are important, most economists focus on the longer, 12-month trend, as it's more indicative of overall efficiency and output strength.

U.S. productivity averaged about 2.7 percent during the 1948-1970 period, then slumped to 1.6 percent from 1971-1995. However, starting in 1995 the technology revolution driven by the personal computer, microprocessor, and the Internet, among other breakthroughs, propelled a large increase in productivity to about 2.5 percent per year. The remarkable productivity rate helped create the record earnings and rising real, median incomes that characterized the "Roaring 90s."

Economic Analysis

The Q3 productivity report was certainly impressive but, frankly, unsustainable. Here are both sides of the productivity gain argument: One school of economists argues that companies have squeezed all they can out of their current payrolls -- that is, that the deep employment cuts during the pronounced recession have resulted in organizations that are pared to the bone. If that's the case, the economy should trend toward monthly job gains of better than 200,000 as the expansion gains steam. Conversely, another school of economists argues that excess capacity, enhanced productivity, and little pressure to add staff means companies and factories can increase output for several quarters more without adding staff. If the latter's the case, payrolls will not increase as much as they historically would during the expansion's initial stage.

Most economists would agree, however, that despite the worst recession in more than 25 years, U.S. companies are becoming leaner and meaner, with a workforce that's increasing its productivity and finding ways to the same (or more) with less: Employees are still a good bargain for most companies. All of the above bodes well for corporate revenue and earnings in the quarters ahead.
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