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Productivity 3Q2012 (Final): Productivity Increase Improved to 2.9%

Written by Steven Hansen

[Note: This post is a markup of the preliminary data post - added statements underlined]

A simple summary of this release is that the rate of productivity growth has been gently growing year-over-year , whilst the annual rate of growth of labor costs marginally increased is literally unchanged (even though the quarter-over-quarter data contracted slightly). Overall, the increase of unit labor costs remain moderate since the Great Recession.

One almost needs to begin with the caveats at the end of this post, as productivity is in the eye of the beholder. My view of productivity is one of an industrial engineer, while the Bureau of Labor Statistics (BLS) are bean counters using a simple hours vs output approach.

Although one could argue that productivity improvement must be cost effective, it is not true that all cost improvement are productivity improvements.

Based on preliminary final data , the Bureau of Labor Statistics reported that non-farm business productivity increased at an annual rate of 1.9% 2.9% in the third quarter of 2012. The market was expecting a increase of .1.6% to 2.0% 2.4% to 2.7%. However, if data is analyzed in year-over-year fashion, productivity has been gently improving since the 1Q2011.

Unit labor costs (non-farm business) decreased at an annual rate of 0.1% 1.9% in the 3Q2012 (1.1% 0.1% year-over-year) with the market expecting an increase of 1.0% to 1.4% a decrease of 0.8%.

Even though a decrease in productivity to the BLS could be considered an increase in productivity to an industrial engineer (see caveats below), this methodology does track recessions. The current levels are well above recession territory.

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

But the output per person has been growing in 2012 after two years “less good”track (negative second derivative).

Seasonally Adjusted Year-over-Year Change of Output per Hour

All this is happening while costs per unit produced remain subdued even after growing this month:

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 1.9 2.9 percent annual rate during the third quarter of 2012, the U.S. Bureau of Labor Statistics reported today. The increase in productivity reflects increases of 3.2 4.2 percent in output and 1.3 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the third quarter of 2011 to the third quarter of 2012, productivity increased 1.5 1.7 percent as output and hours worked rose 3.3 3.5 percent and 1.8 percent, respectively.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.

Unit labor costs in nonfarm businesses decreased 0.1 declined 1.9 percent in the third quarter of 2012, while hourly compensation increased 1.8 0.9 percent. Unit labor costs rose slightly, 1.1 0.1 percent, over the last four quarters.

BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.

Manufacturing sector productivity declined 0.4 0.7 percent in the third quarter of 2012, as output and hours worked decreased 0.6 0.7 percent and 0.2 percent, respectively and hours were unchanged.  Productivity fell 0.7 1.6 percent in the durable goods sector and increased 0.1 0.2 percent in the nondurable goods sector. Over the last four quarters, manufacturing productivity increased 1.5 1.3 percent, as output increased 4.1 4.0 percent and hours worked rose 2.6 percent. Unit labor costs in manufacturing rose 1.5 grew 3.2 percent in the third quarter of 2012 and decreased 0.8 1.5 percent from the same quarter a year ago.

Chart from Preliminary Report

Chart from Final Report

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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