Nonfarm productivity, measured as an output of goods and services produced per hour worked, declined at an annual rate of 0.50% in the second quarter, compared to the median estimates of an increase of 0.40%. The data from the US labor department released on Tuesday showed that compared to a year ago, US nonfarm productivity is down 0.40%, falling for the third consecutive quarter and highlighting the subdued wage growth in the US.
Unit labor costs in nonfarm businesses increased 2.0% on an annual basis after falling 0.20% in the first quarter this year. On a year over year basis, unit labor costs edged slightly higher, rising 2.10% in Q2. On a real inflation adjusted basis, compensation per hour in the nonfarm sector was seen declining at an annual rate of 1.10% in the second quarter, but up 0.60% compared to a year ago.
Paul Ashworth, chief U.S. economist at consultancy Capital Economics, said, “In the short term, it’s hard to be anything other than pessimistic, just because this has been going on for so long now.” Joseph LaVorgna, chief economist at Deutsche Bank Securities in New York also had similar views, saying, “The reason the economy has still been able to expand is because of labor input. Firms are hiring people at a reasonably healthy rate. However, we do not believe this can last, because strong hiring in the face of weak productivity necessarily implies a further deterioration in corporate profit margins.”
The manufacturing sector continued to remain volatile, showing that productivity was down 0.20% at an annual rate in the second quarter, but was seen faring better compared to other sectors on the whole. The drop in manufacturing production was due to declining in hours.
Although productivity and labor costs are known to be volatile and subject to revisions, the long-term pace of productivity is a key factor. In June, Federal Reserve Governor, Janet Yellen said that her outlook for productivity growth was a key uncertainty for the US economy. “Understanding whether, and by how much, productivity growth will pick up is a crucial part of the economic outlook. But this is a very difficult question, and economists are divided. Some are relatively optimistic, pointing to the continuing pace of innovations that promise revolutionary technologies, from genetically tailored medical therapies to self-driving cars. Others believe that the low-hanging fruit of innovation largely has been picked and that there is simply less scope for further gains.” Ms. Yellen said.
The subdued pace of wage growth is expected to keep the Federal Reserve on course to keep monetary policy steady. Following the release of the report, the US dollar turned weaker, with the ICE Futures US dollar index closing Tuesday at 96.06 and by early Wednesday, slipped to 95.67 erasing last Friday’s NFP led gains.
Despite the pessimistic outlook, economic growth and wages are expected to rise in the near term as acceleration in wages and income amid a tightening labor market is expected to show productivity rise eventually. The us-based forecasting firm, Macroeconomic Advisers said that they expect the US GDP to rise at an annual rate of 3% in the third quarter. The forecasts come in close to that of Atlanta Fed’s GDPNow model, which is currently forecasting a 3.70% increase in GDP during the third quarter.