Third Quarter 2018 Revised Productivity and Unit Labor Costs

Productivity gains were marginally better in the third quarter of 2018 according to revised data from the Bureau of Labor Statistics.  Their updated estimate puts productivity at 2.3 percent, up 0.1 percentage point from the initial tally.  Despite this uptick, productivity slowed from 2.9 percent in the second quarter of this year.  Additionally, unit labor costs were downwardly revised to a 0.9 percent increase versus 1.2 percent in the first count, but even the slower gain is an increase versus the prior the second quarter's decline of 1.0 percent. 

Two factors go into productivity. The first is output; this describes what our economy produced during a specific period, similar to gross domestic product.  The BLS indicates output increased 4.1 percent on a seasonally adjusted annualized rate (SAAR), unchanged from the first estimate but slowing from 5.0 percent in the prior period.  Secondly, labor hours are needed to calculate productivity.  Hours worked increased 1.8 percent across the entire economy.  Combing the two, it took 1.8 percent more hours worked to increase output 4.1 percent.  America was more productive in the third quarter, but, as mentioned earlier, the rate of improvement slowed.

In addition to productivity, one other variable is needed to calculate changes to unit labor costs: hourly compensation growth.  This measure of pay was downwardly revised to 3.1 percent from 3.5 percent.  This pushed the unit labor costs down to 0.9 percent from the earlier mentioned 1.2 percent, boding well for inflation data since labor costs are often a firm’s greatest production cost.

This indicator remains positive as productivity continued growing.  Unfortunately, it is backward looking, and other coincident and forward-looking indicators are less encouraging.  Time will tell, but there is a sense here at Atlas that the second quarter of 2018 will be viewed as a recent peak in economic activity growth.  Deceleration has set in, so future iterations of productivity are probably not going to look as good as the second and third quarters of this year.