The third quarter’s total nonfarm productivity came in much higher than expected at 3.1% (an increase of 2.1% was anticipated). Meanwhile, unit labour costs in the quarter were well below what was anticipated at 0.3%, where a reading of 1.2% was expected. Unit labour costs remain an incredibly volatile index and subject to fairly large revisions. On a 12-month rate-of-change basis, productivity was unchanged, versus a 0.3% decline in the previous quarter. Manufacturing productivity was 1.0% higher, against a 2.2% rise in unit labour costs.
While the headline figure looks strong, it follows the worst string of weakness since 1979. Overall productivity remains incredibly muted. For example, since 2012, productivity growth has been just 0.6% per year, compared to 1.6% from 2005 to 2011 and a whopping 3% from 1996 to 2004. This slowdown has been apparent not just in the United States but also in other advanced and developing nations. Part of the reason (we believe) is simply down to the supply glut of labour, due in large part to the emergence of the Chinese and other emerging market workforces, along with the opening up of the formerly communist states. This excess supply of cheap labour has likely offset the need for companies to invest in productivity enhancing technologies as they have seen their unit labour costs steadily decline. Or, is productivity simply being mismeasured give all the truly quite innovative changes we see taking place around us? In truth, it is very difficult to accurately measure service sector productivity. The fact that we are currently seeing very little inflation would suggest that perhaps it has been stronger than we think; yet, as Fed Vice Chairman Stanley Fischer recently said, if we are mismeasuring it, things still don’t really feel that great. So perhaps, according to Fischer, it is being measured properly after all. The fact there is so much disagreement about this measure is unfortunate given that it is perhaps the most important statistic in economics. Not only as a measure of standard of living, but also from the perspective of setting the right monetary policy. For the Fed, if productivity really is so dismal, it raises the possibility of inflation rising sooner than later; if it is actually stronger than reported (as Greenspan believed in the late 1990s), the bank can possibly afford to keep rates lower for longer. For now, the Fed seems to be taking the data with due caution.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.