U.S. Worker Productivity Jumps in Third Quarter -- Update

By Eric Morath Features Dow Jones Newswires

U.S. workers boosted output per hour this summer at the best rate in three years, a sign that long sluggish productivity gains might finally be breaking out.

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Nonfarm business-sector productivity, measured as the goods and services produced per hour worked, increased at a 3.0% seasonally adjusted annual rate in the third quarter, the Labor Department said Thursday. The gain was better than economists had expected and the largest quarterly improvement since the third quarter of 2014.

Last quarter's increase could be skewed due to the effects of the recent hurricanes, but the broader trend points to firmer productivity gains after the measure trended near zero much of 2015 and 2016. Through the first nine months of this year, worker productivity advanced at a 1.5% annual rate -- putting 2017 on pace to be the best year for efficiency gains since 2010, when the economy was first emerging from a deep recession.

"The third quarter is a big turnaround from the stagnation seen a year ago and suggests that real wages will begin to pick up more rapidly soon, " said Michael Pearce, economist at Capital Economics.

Sluggish productivity gains is a factor many economists say has hindered recent wage increases despite a historically low unemployment rate pointing toward a tight labor market. And indeed, average hourly earnings increased 2.9% from a year earlier in September, matching the best gain since the recession ended.

The effects of hurricanes, which struck the southern U.S. in late summer, may be influencing the productivity data, though the Labor Department didn't report any specific effects. Other government data show that the storms appeared to reduce the number of hours worked, particularly in labor-intensive fields such as restaurants and hospitality, but had little impact on overall economic growth.

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Output rose at a 3.8% rate during the third quarter, the Labor Department said, while hours worked were up at a 0.8% pace -- matching the second-smallest increase since 2010.

But the broader trend -- productivity also rose 1.5% from a year earlier -- shows the measure is moving closer to historical norms. From 1947 to 2016, labor productivity advanced at a 2.1% annual rate. From 2007-2016, the average improvement 1.2%.

Productivity would need to advance even a bit better than the recent pace to keep the economy growing near a 2% rate. That is because an aging population limits how much the labor supply can grow.

The nonpartisan Congressional Budget Office had projected in June for nonfarm business productivity to advance 1.7% from 2017 to 2027. That gain would put the economy in line for a potential growth rate of about 1.8% during that decade.

President Donald Trump has targeted economic growth of at least 3% annually, a pace that has been achieved the past two quarters. For it to be maintained over the longer run, however, productivity would need to improve more rapidly or the labor supply would need to increase above projected rates.

Thursday's report showed productivity declining last quarter at manufacturing firms, but that was more than offset by strong gains at other businesses. Over the prior year, manufacturing productivity advanced at nearly the same rate as for workers in other businesses.

Unit labor costs at nonfarm businesses rose at a 0.5% rate in the third quarter, the Labor Department said. Unit labor costs are the ratio of hourly pay to productivity. From a year earlier, unit labor costs fell 0.1%. Tempered labor-cost pressures are consistent with soft wage growth and consumer-price inflation in recent years.

Write to Eric Morath at eric.morath@wsj.com

WASHINGTON -- U.S. workers boosted output per hour this summer at the best rate in three years, a sign that long sluggish productivity gains might finally be breaking out.

Nonfarm business-sector productivity increased at a 3.0% seasonally adjusted annual rate in the third quarter, the Labor Department said Thursday. The gain was better than economists had expected and the largest quarterly improvement since the third quarter of 2014.

Productivity is on pace to grow this year at the best pace since 2010, when the economy was first emerging from a deep recession. That's an improvement from near zero much of 2015 and 2016.

"The third quarter is a big turnaround from the stagnation seen a year ago and suggests that real wages will begin to pick up more rapidly soon, " said Michael Pearce, economist at Capital Economics.

Sluggish productivity gains is a factor many economists say hinders wage increases despite a historically low unemployment rate. And indeed, average hourly earnings increased 2.9% from a year earlier in September, matching the best gain since the recession ended.

The effects of hurricanes, which struck the southern U.S. in late summer, may be influencing third-quarter figures, though the Labor Department didn't report any specific effects. Other government data show that the storms appeared to reduce the number of hours worked, particularly in labor-intensive fields such as restaurants and hospitality, but had little impact on overall economic growth.

Output rose at a 3.8% rate during the third quarter, the Labor Department said, while hours worked were up at a 0.8% pace -- matching the second-smallest increase since 2010.

But the broader trend -- productivity rose 1.5% from a year earlier -- shows the measure is moving closer to historical norms. From 1947 to 2016, labor productivity advanced at a 2.1% annual rate. From 2007-2016, the average improvement 1.2%.

Two Men and a Truck, a Lansing, Mich., moving company with 357 U.S. locations, is deploying technology to serve more customers with its existing workforce of about 7,000.

"In a tight labor market, it's difficult to find people, so you have to find efficiencies to expand your business," said Co-Chief Executive Jon Nobis.

In the past year, the company rolled out online estimates, reducing the amount of time customers-service representatives spend on the phone. The company is also giving drivers tablet computers instead of stacks of paperwork. Filling out forms electronically cuts about 20 minutes of data entry, per move. The company expects to complete more than 500,000 moves this year.

Productivity would need to advance even a bit better than the recent pace to keep the economy growing near a 2% rate. That is because an aging population limits how much the labor supply can grow. The Labor Department estimates the labor force will grow at a 0.7% annual rate through 2026.

The nonpartisan Congressional Budget Office projected in June for nonfarm business productivity to advance 1.7% from 2017 to 2027. That gain would put the economy in line for a potential growth rate of about 1.8% during the decade.

President Donald Trump has targeted economic growth of at least 3% annually, a pace that has been achieved the past two quarters. For it to be maintained over the longer run productivity would need to improve or the labor supply would need to increase above projected rates.

"The productivity numbers are encouraging at face value, but getting to 3% is still going to be a huge stretch," said Scott Brown, an economist at Raymond James.

Thursday's report showed unit labor costs, the ratio of hourly pay to productivity, rose at a 0.5% rate in the third quarter, and fell 0.1% from a year earlier. Tempered labor-cost pressures are consistent with low inflation.

Write to Eric Morath at eric.morath@wsj.com

(END) Dow Jones Newswires

November 02, 2017 13:46 ET (17:46 GMT)