Econoday Report: Productivity and Costs 3, 2005

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2005 U.S. Economic Events & Analysis

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Productivity and Costs

Definition
Productivity measures the growth of labor efficiency in producing the economy's goods and services. Unit labor costs reflect the labor costs of producing each unit of output. Both are followed as indicators of future inflationary trends. Why Investors Care

Released on 11/3/05 For Q3 2005

Nonfarm productivity, Q/Q change, SAAR
Actual	4.1%
Consensus	2.7%
Consensus Range	2.0% to 3.3%

Unit labor costs, Q/Q change, SAAR
Actual	-0.5%
Consensus	1.6%
Consensus Range	0.8% to 3.0%

Highlights
Productivity rose to a much stronger-than-expected 4.1% rate in the third quarter, up from 2.1% in the second quarter. The improvement was centered in hours worked, which grew much more slowly at 0.1% compared against a 2.2% rate in the prior quarter. Growth in non-farm output was a bit slower in the quarter, though still at a strong 4.2% rate.

The rise in productivity sent unit labor costs lower, down 0.5% vs. a 1.8% rise in the second quarter. The yearlong trend of slowing productivity growth had put upward pressure on wages. Today's report indicates a lessened risk of wage-push inflation -- a big plus for the bond market and a relief to Federal Reserve policy makers who have been raising rates in an effort to head off inflation, the most severe manifestation of which is in wages.

Year-on-year rates shows productivity up 3.0% in the quarter compared with 2.3% in the second quarter. Labor costs were up 2.7% compared with 4.1% -- this is a headline number for the report. Note that the Bureau of Labor Statistics said it could not break out hurricane effects.

Real compensation (adjusted for inflation) fell 1.4% in the month after slipping 0.1% in the second quarter. Declining compensation may be good for inflation and perhaps even for corporate profits (at least short term), but it is a negative for consumer spending and ultimately for total economic growth.

Bonds rose on the data which are a surprise, confirming the Fed's long-held faith in strong productivity growth (a line prominently repeated in each FOMC statement, including Tuesday's).

Market Consensus Before Announcement
Nonfarm productivity rose at a 1.8 percent rate in the second quarter, slower than the first quarter's 3.2 percent rate. At the same time, unit labor costs increased at a 2.5 percent rate, slightly faster than in the first quarter but significantly lower than in the second half of 2004.

Nonfarm productivity Consensus Forecast for Q3 05: 2.7 percent rate
Range: 2 to 3.3 percent rate

Unit labor costs Consensus Forecast for Q3 05: 1.6 percent rate
Range: 0.8 to 3.0 percent rate

Trends

Nonfarm productivity growth has remained healthy during this expansion, but it has prevented employment from growing very fast and this hurt income growth to some extent. Unit labor costs tend to fall when productivity growth accelerates and then rises as productivity growth abates.

Data Source: Haver Analytics

2005 Release Schedule

Released On: 2/3 3/3 5/5 6/2 8/9 9/7 11/3 12/6

Released For: Q4 Q4r Q1 Q1r Q2 Q2r Q3 Q3r

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