Productivity 3Q2013 (Final): Productivity Up, Labor Costs Down

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A simple summary of this release is that the rate of productivity growth is up , whilst the rate of growth of labor costs is down in 3Q2013.

[Note: This post is a markup of the preliminary data post. The market was expecting an improvement of 2.5% to 2.7% – versus the 3.0% actual. There is enough differences in this post that I begin to wonder if the BLS should abort issuing a preliminary productivity.]

The headlines annualize quarterly results (Econintersect uses year-over-year change in our analysis).

Unit labor costs (non-farm business) decreased at an annual rate of 0.6% 1.4% in the 3Q2013 (1.5% 2.1% year-over-year).

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

Even though a decrease in productivity to the BLS could be considered an increase in productivity to an industrial engineer, 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 growth has been very slight to non-existent.

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

All this is happening while costs per unit produced continue to grow.

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

Charts from the preliminary Press Release:

Charts from the final Press Release:

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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