U.S. productivity rises 9.4%
By Michael Oneal
Chicago Tribune
The productivity of U.S. workers grew at its fastest pace in more than 20 years during the third quarter, providing yet another sign that corporate America and the nation's economy are both on the mend.
The Labor Department reported yesterday that output per worker surged at an annualized rate of 9.4 percent during the quarter. That revises a preliminary estimate of 8.1 percent issued a month ago and tops the impressive 7 percent growth posted in the second quarter. It was the best quarterly showing since 1983.
The report also showed that labor costs declined by 5.8 percent, which some economists think may help reduce the pressure on Federal Reserve officials to raise interest rates as the economy picks up steam.
"Unit labor costs fell sharply," said William Dudley, chief U.S. economist for Goldman Sachs in New York. "So there isn't much pressure on inflation."
Economists said the quarter's burst in productivity is almost certainly unsustainable. It owes much to the fact that companies are squeezing more output from fewer workers as they cope with demand juiced up by this year's tax cuts and rock-bottom interest rates.
But it wasn't a fluke, either. Productivity has been surging over the past five years at an annualized rate of around 3 percent — its best five-year showing since 1966, according to Mark Zandi, chief economist of Economy.com.
That suggests that companies and their workers have also become much more efficient as they learn to use the technology they bought over the period. And it should ultimately boost the nation's standard of living.
"The growth reflects what's best about our economy," Zandi said. "It gets to our underlying strength."
Productivity growth is important because it means average hourly output per worker is growing. That allows companies to earn better profits and lets them pay workers more without raising prices. That in turn keeps a cap on inflation and means people have more to spend.
This virtuous cycle, economists say, is what improves America's living standards over time.
For the nation's unemployed, of course, none of that is much comfort. The growth in productivity is partly because of the 2.4 million jobs lost during the downturn as companies have struggled to cut costs. It remains a big reason jobs have been so hard to find as the economy has slowly improved.
In fact, corporations so far have been the biggest beneficiaries of the productivity improvements during the recovery.
As the nation's economy grew by 8.2 percent in the third quarter — powered by tax breaks and low interest rates — companies saw a staggering 30 percent increase in profits, according to the Commerce Department.
They've begun to hire in dribs and drabs. But mostly they've responded to increased demand by asking existing employees to work harder — and not for much more pay. The productivity report showed that average hourly compensation (adjusted for inflation) grew less than 1 percent during the third quarter.
"Americans are working harder, not smarter," contends Stephen Roach, chief economist for Morgan Stanley in New York. "Businesses are delivering profits mainly by unrelenting cost cutting."
Most economists believe the economy will slow from its frothy third-quarter pace in coming months as the effects of government stimulus wear off. Since that would mean companies were producing less even as they begin to hire more, it would also cut the productivity rate sharply — probably below 3 percent.
But Goldman's Dudley said that could be a good thing. The hope is that companies flush with their increased profits will start spending more heavily on new equipment, which in turn would build demand and lead to more hiring.
"We need the job growth," Dudley said. Without it, consumer spending might slow and bring the budding recovery to a halt.
Slowly but surely, the cycle of growth and hiring seems to be under way.
In addition to a flurry of other good news on increased production in the last two weeks, the Institute for Supply Management yesterday released its monthly survey of non-manufacturing companies. It showed that business activity among service firms slowed only slightly in October from a strong showing in September, while hiring expanded.
On Monday, the ISM released a similar survey for manufacturing companies.
It showed the highest level of business activity in the past 20 years and indicated that new orders were surging. It also showed that manufacturing employment is growing — if only slightly — for the first time in three years.
The employment situation will be clearer tomorrow when the Labor Department releases data on hiring and unemployment in November.
Economists are predicting an increase of 150,000 jobs, which would be an uptick from the 126,000 jobs added in October.
