US Q3 productivity raised; labour costs still running high

US worker productivity rebounded at a bit faster pace than initially thought in the third quarter, though the trend remained weak, keeping labour costs elevated.

Economists said the report from the Labor Department on Wednesday (Dec 7) pointed to inflation staying high and the Federal Reserve continuing to raise interest rates for some time. The US central bank is in the midst of its fastest monetary policy tightening cycle since the 1980s as it fights to bring inflation back to its 2 per cent target.

“While not the timeliest measure, the recent strength in unit labour costs is consistent with the idea that the tight labour market is keeping upward pressure on employment costs,” said Daniel Silver, an economist at JPMorgan in New York.

Nonfarm productivity, which measures hourly output per worker, rose at a 0.8 per cent annualised rate last quarter. That was revised up from the 0.3 per cent pace reported last month and ended two straight quarterly decreases.

Productivity dropped at a 4.1 per cent rate in the second quarter. The revision to the third-quarter data was due to upgrades to output and hours worked.

Economists polled by Reuters had expected productivity would be revised up to a 0.6 per cent pace.

Productivity fell at a 1.3 per cent rate from a year ago, instead of the previously reported 1.4 per cent pace. It has now declined for three straight quarters on an annual basis. Large shifts in the composition of the workforce in the wake of the Covid-19 pandemic have made it harder to measure productivity.

But with productivity growth averaging a 1.6 per cent rate over the last five years, some economists said the recent weakness was overstated.

Unit labour costs – the price of labor per single unit of output – increased at a 2.4 per cent rate. They were previously reported to have advanced at a 3.5 per cent pace.

SEE ALSO

US trade deficit widens on greater imports, drop in exports

Unit labour costs rose at a 5.3 per cent rate from a year ago, instead of the previously reported 6.1 per cent pace.

“Unit labour cost growth is running at a pace that is far too fast to be consistent with the Fed’s inflation target, as is unit price growth with the nonfarm price deflator up 7.1 per cent over the last four quarters,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York. “The productivity, cost, and profit margins data will be important in shaping how inflation and the trajectory of the economy unfolds.”

Hourly compensation increased at a 3.2 per cent pace, revised down from the 3.8 per cent rate reported last month. Compensation rose at 2.3 per cent pace in the second quarter. It increased at a 4.0 per cent rate compared with the third quarter of 2021, rather than at a 4.7 per cent as previously reported. REUTERS