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posted on 03 November 2016

3Q2016 (Preliminary): Headline Productivity Improves

Written by Steven Hansen

A simple summary of the headlines for this release is that the growth of productivity improved while the labor costs grew less than productivity (headline quarter-over-quarter analysis). The year-over-year analysis gives one a different view of the data.

Analyst Opinion of Productivity and Costs

Although many times the data is significantly revised between releases - it did not happen in this release. But IF I believed this data, costs are rising significantly whilst productivity is in the toilet (as I only look at year-over-year data - the headline compounding distorts the view).

The market was expecting:

seasonally adjusted quarter-over-quarter at annual rate Consensus Range Consensus Preliminary Actual Final Actual
Nonfarm productivity 1.6 % to 2.8 % +2.2 % +3.1 %
Unit labor costs 0.7 % to 1.5 % +1.4 % +0.3 %

The headlines annualize quarterly results (Econintersect uses year-over-year change in our analysis). If data is analyzed in year-over-year fashion, non-farm business productivity was unchanged year-over-year, and unit labor costs were up 2.3 % year-over-year. Bottom line: the year-over-year data is saying that costs are rising faster than productivity.

Please note that the following graphs are for a sub-group of the report nonfarm > business.

Seasonally Adjusted Year-over-Year Change in Output of Business Sector

Seasonally Adjusted Year-over-Year Change of Output per Hour for the Business Sector

All this is happening while business sector unit labor costs increased.

Seasonally Adjusted Year-over-Year Rate of Change of Unit Labor Costs

The headlines from the press release:

Nonfarm business sector labor productivity increased at a 3.1-percent annual rate during the third quarter of 2016, the U.S. Bureau of Labor Statistics reported today, as output increased 3.4 percent and hours worked increased 0.3 percent. (All quarterly percent changes in this release are seasonally adjusted annual rates.) The quarterly increase in nonfarm business sector labor productivity was the first increase after three consecutive declines in the measure. From the third quarter of 2015 to the third quarter of 2016, productivity was unchanged. (See chart 1)

Unit labor costs in the nonfarm business sector increased 0.3 percent in the third quarter of 2016, reflecting a 3.4-percent increase in hourly compensation and a 3.1-percent increase in productivity. Unit labor costs increased 2.3 percent over the last four quarters. (See chart 2)

Final Chart from 2Q2016

Prelimary Chart for 3Q2016

Caveats Relating to Productivity

Productivity is determined using monetary criteria, and does not recognize outsourced man hours - in other words, if a business cuts half of its workforce by outsourcing a sub-component or sub-service, this would be a 50% productivity improvement.

These productivity measures describe the relationship between real output and the labor time involved in its production. They show the changes from period to period in the amount of goods and services produced per hour. Although these measures relate output to hours at work of all persons engaged in a sector, they do not measure the specific contribution of labor, capital, or any other factor of production. Rather, they reflect the joint effects of many influences, including changes in technology; capital investment; level of output; utilization of capacity, energy, and materials; the organization of production; managerial skill; and the characteristics and effort of the work force.

Econintersect believes a better measure (if you must use monetary tools to tract productivity) would be competitiveness.

Looking at productivity / output long term - output fall below 0% year-over-year change is a good sign that a recession is underway. Another way to look at it - if productivity rate of gain is falling, this could be an indicator a recession is coming.



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