For the first time since 1982, labor productivity in the US has fallen for three consecutive quarters.
The 1.4% drop in Q3 from the same period last year was smaller than Q2’s 2.1% decline. As a reminder, this is just output per hour. So, output divided by hours worked.
The streak of declines (figure below) is certainly notable, although in my judgment, drawing conclusions about the impact of the pandemic on trends in labor productivity will remain a fool’s errand for the foreseeable future.
This is just one more “first time in 40 years” moment. The historical analog isn’t a coincidence.
In Q3, quarterly productivity rose (figure below), but the 0.3% increase missed estimates. Economists were looking for a 0.5% print.
The range was -0.4% to 1.3%. The release contained revisions and updates.
In Q1, productivity as measured on a quarterly SAAR basis plunged by the most in almost 80 years. In Q2, the drop was smaller, but still counted among the largest in modern US history.
Nonfarm business output rose in Q3, after shrinking for consecutive quarters (figure below).
If slower (or negative) growth alongside robust hiring puts downward pressure on productivity, then better growth and slower hiring pushes productivity up. Hours worked rose at the slowest pace of the pandemic recovery, albeit still at a reasonably brisk rate.
Note that the juxtaposition between plunging productivity and surging wages earlier this year pushed unit labor costs sharply higher. As originally reported, they rose double-digits in both Q1 and Q2, the first back-to-back quarterly double-digit increases since — you guessed it — 1982. Similarly, the four-quarter increase, as originally reported for Q2, was the largest since that same year.
In Q3, downward revisions made things appear a bit less onerous in terms of wage-price spiral dynamics, but the situation remained tense, for lack of a better word (figure below).
Economists were looking for a 4% ULC print. So, the 3.5% increase for Q3 was good news to the extent it suggested less in the way of wage-price spiral pressure.
Ultimately, though, the data did little to dispense with the notion that at least some of the inflation impulse in the US is “coming from inside the house,” to channel the old horror movie cliché. That is: Inflation isn’t solely due to exogenous phenomena and bad luck.
During his press conference on Wednesday, Jerome Powell repeated that the Fed doesn’t see a wage-price spiral.
Compensation per hour rose 3.8% during the third quarter, lower than the prior period’s 4.5% pace. Adjusted for inflation, compensation fell 1.7% in Q3. It was the third consecutive quarter of negative real hourly compensation “growth.”
