Econoday Report: Productivity and Costs November 5, 2009

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Productivity and Costs

Released on 11/5/2009 8:30:00 AM For Q3:09

	Prior	Consensus	Consensus Range	Actual
Nonfarm productivity - Q/Q change - SAAR	6.6 %	6.3 %	4.8 % to 8.5 %	9.5 %
Unit labor costs - Q/Q change - SAAR	-5.9 %	-3.9 %	-5.9 % to -1.8 %	-5.2 %

Highlights
Recession induced labor cost cutting has continued into the recovery and businesses are seeing gains in productivity as a result. Nonfarm business productivity in the third quarter surged 9.5 percent annualized, following a revised 6.9 percent boost in the second quarter. The third quarter advance came in above the market forecast for a 6.3 percent surge. This was the largest gain in productivity since the third quarter of 2003, when it rose 9.7 percent. In tandem, unit labor costs dropped an annualized 5.2 percent after declining a revised 6.1 percent in the second quarter. The consensus had projected a 3.9 percent plunge.

The latest spike in productivity reflected both higher output and fewer hours worked. Output jumped an annualized 4.0 percent while hours worked fell an annualized 5.0 percent.

Year-on-year, productivity improved to up 4.3 percent in the third quarter from 1.9 percent the previous quarter. Year-ago unit labor costs dropped to minus 3.6 percent from down 1.2 percent in the second quarter.

A huge part of the third quarter boost in productivity came from the manufacturing sector which saw a 13.6 annualized percent spike after a 6.8 percent gain in the second quarter. The latest manufacturing number was the largest quarterly increase for the series which begins in 1987. Much of the improvement likely came from the auto sector which had seen huge layoffs but recent output increases from the impact of the cash-for-clunkers program.

The latest productivity numbers are good news for companies trying to improve their profits but they are bad news for the unemployed. Firms are expecting remaining employers to work harder instead of starting to rehire.

The third quarter jump in productivity should help lift equities.

Market Consensus Before Announcement
Nonfarm productivity in the final reading for the second quarter was revised up slightly to an annualized 6.6 percent boost from the initial estimate of a 6.4 percent gain. Unit labor costs were revised to an annualized drop of 5.9 percent, compared to the original estimate of a 5.8 percent fall. Looking ahead, we are likely to see a notably positive gain for third quarter productivity as the output component will be somewhat tracking the third quarter GDP boost of 3.5 percent and labor inputs are likely continued to have been cut.

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

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

2009 Release Schedule

Released On: 2/5 3/5 5/7 6/4 8/11 9/2 11/5 12/3

Released For: Q4:08 Q4:08 Q1:09 Q1:09 Q2:09 Q2:09 Q3:09 Q3:09

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