American labor productivity increased more than expected in the third quarter, according to a revised estimate released by the Bureau of Labor Statistics on Monday. Third-quarter output was revised from +3.7 percent to +4.7 percent while hours worked remained unchanged at +1.7 percent, pushing total non-farm business sector labor productivity up to +3 percent for the quarter.
Labor productivity is a highly watched but sometimes nebulous economic indicator. While labor conditions are sensitive to short-term cyclical trends, productivity gains are essential for long-term economic growth. Increases in productivity contribute to real value creation in the economy and can lead to higher wages and economic growth without contributing to inflation. Output and hours worked — the components of the productivity calculation — have historically been subject to cyclical mood swings.
Third-quarter data follow a second-quarter productivity increase of just 0.9 percent and a first-quarter decline of 1.7 percent. Since the BLS makes calculations off previously released gross domestic product and labor market data, economists anticipated a jump in productivity following the relatively strong third-quarter GDP report.
The other side of the BLS report deals with unit labor costs, which were revised down to -1.4 percent for the revised third quarter quarter from -0.6 percent.
The costs associated with production can be used as a leading indicator of inflationary pressure. Increased labor costs can ultimately be passed on to the consumer, as reflected in the consumer price index or the personal consumption expenditures index, and they affect the headline inflation rate. Conversely, a contraction in unit labor costs — which have contracted in two of the last three quarters — is an indicator of deflationary pressure in the pipeline.
The data are once again likely to be interpreted as a green light for the U.S. Federal Reserve’s monetary stimulus strategy. Quantitative easing — a program through which the Fed is purchasing $85 billion worth of agency mortgage-backed securities and longer-term Treasuries each month — has been the law of the land for more than a year.
However, instead of increased inflation, we have pretty much seen the opposite, as reflected the by the recent decline in unit labor costs as well as weak readings from the consumer price index and the personal consumption expenditures price index.