WASHINGTON (MarketWatch) — U.S. productivity rose 1.9% in the third quarter as labor costs fell, marking the sixth increase in the last seven quarters, government data showed Thursday.
Yet productivity growth has tapered off since the end of 2009, and if the usual patterns hold, companies might start to hire more workers soon. That would be welcome news for millions of jobless Americans.
“Since productivity has slowed, further gains in nonfarm payrolls are likely to be realized,” chief economic strategist Dan Greenhaus of Miller Tabak & Co. said in an email.
Productivity typically soars after a recession because companies cut their labor force more than they reduced their output of goods and services. As an economy recovers, companies tend to increase overtime until demand outstrips what remaining workers can produce. At that point, businesses start to hire again.
So far, however, there’s little evidence that U.S. companies are ready to start adding jobs at a rapid clip. The nation’s unemployment rate remains stuck near 10%, and weekly jobless claims have been flat in 2010. Read about latest increase in weekly claims.
Companies can put off new hiring, and still improve productivity, by using more machines or automated processes, among other things.
Labor costs are low
In the third quarter, real output grew at an annualized rate of 3.0%, while hours worked rose 1.1%, the Labor Department reported. Productivity is defined as real output divided by hours worked.
In the U.S. manufacturing sector, productivity increased by 0.4%.
The unit cost of labor, meanwhile, dipped 0.1% in the third quarter as increased output more than offset slightly higher compensation costs.
Unit labor costs are still 1.9% lower compared to one year ago, suggesting companies have become more efficient at producing goods and services. Unit-labor costs reflect how much it costs a business to produce one unit of output — a ton of steel, for instance.
Compensation per hour rose 1.8%. Yet real compensation per hour, which adjusts for inflation, increased by a much smaller 0.4%. Real hourly compensation has fallen 0.8% in the past four quarters.
Once an economy is back to functioning normally, higher productivity is a good thing. It tends to result in better wages for workers and bigger profits for companies, so it’s seen as the key to a rising standard of living.
Yet the data are notoriously difficult to measure, especially in a service-based economy, and the government’s initial reports are frequently revised.