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Thursday, November 06, 2003

Staggering Rise in US Labour Productivity

US labour productivity may have risen at an astounding 8.5% in the third quater, at least that's what Bloomberg are telling us. Following close on the heals of a 7.2% growth in GDP for the same quarter these numbers clearly are incredible: frighteningly so. It is clear that something pretty important is happening, but I fear we may need to wait for the dust to settle before we can see what that 'something' actually is.

U.S. worker productivity may have grown in the third quarter at the fastest pace in more than a year as economic growth surged, economists said they expect a government report to show today. The Labor Department's gauge of how much an employee produces for every hour worked may have risen at an 8.5 percent annual rate from July through September, the most since the first quarter of 2002, when the economy was emerging from recession, according to the median of 64 estimates in a Bloomberg News survey. In the second quarter, productivity rose at a 6.8 percent rate.

Last quarter saw the economy expand at a 7.2 percent annual pace, the most in 19 years. During those three months, companies cut 41,000 workers from payrolls, suggesting remaining employees were more efficient. The resulting boost to corporate profits may soon lead to more investment and renewed hiring. "While it will be difficult to grow at quite that pace in coming quarters, it seems clear we have entered a new phase of economic expansion,'' Treasury Secretary John Snow said a speech to the Economic Club of Washington. Private economists agree. "As corporations continue to register higher profits, you will ultimately see new hiring programs kick in,'' said Bill Sullivan, a senior economist at Morgan Stanley in New York. "Ultimately these productivity gains slow and businesses must begin to raise payroll levels.''

The Labor Department issues the report at 8:30 a.m. Washington time along with statistics that may show a decline in claims for unemployment benefits. New applications may have dropped by 6,000 in the week ended Saturday to 380,000, based on the median of forecasts. Last week would be the fifth in a row for claims to hold below 400,000, the longest such stretch since six weeks in January and February.

The ability to produce more with fewer workers reflects past investments in computers and other equipment that are still making employees more efficient. From 1996 through 2000, productivity gains averaged 2.5 percent a year, more than a percentage point higher than the 1976-1995 average of 1.4 percent. "Much of the strength we saw in the third quarter is likely to continue,'' Snow said in his speech. ``This is not a fleeting glimmer -- there is real muscle behind the growth trend.'' The surge in productivity "probably is a lagged tribute to the 1990s boom in capital investment,'' said Bill Sharp, a senior economist at J.P. Morgan Securities Inc. in New York.

Greater efficiency may have damped unit labor costs, or the amount paid for each unit of production, according to the survey. Costs may have dropped 5 percent last quarter, the most since the first quarter of 2002, following a 2.8 percent decrease in the previous three months, according to the survey median. Falling costs together with rising sales are providing a lift to corporate balance sheets. Third-quarter profits are increasing at the fastest pace in more than three years. Earnings have risen 21.7 percent, based on results from 80 percent of the Standard & Poor's 500 companies reporting so far, according to Thomson Financial. Almost two-thirds of the companies that reported profits topped the average estimate.

Productivity historically slows in the quarter following a surge. It has grown at a 7 percent annual pace or more 26 times since the end of World War II. In the subsequent three-month periods, it dipped to an average of 1.6 percent while companies hired an average of 481,000 workers. "These productivity numbers aren't sustainable,'' said Russell Sheldon, a senior economist at BMO Nesbitt Burns Inc. in Toronto. If business leaders ``remain cautious at this point in the recovery, other companies are going to get the lion's share of growth, and most aren't going to let that happen.''

Companies may have added 65,000 workers to payrolls last month, following a gain of 57,000 in September, the Labor Department may report Friday, according to the median of 68 estimates in a separate survey. September's gain was the first since January. The unemployment rate may have held at 6.1 percent for a third month, the survey found.

For their part, company leaders are hesitant to jump the gun on hiring. "With all the gains that have been made in productivity, employment is going to come back very gradually,'' said Michael Jackson, chief executive officer of AutoNation Inc., the largest U.S. retailer of new and used cars, in a television interview with Bloomberg News last week. "And I see a gradual recovery from the consumer perspective, not roaring back.'' The economy may grow at a 4 percent annual rate this quarter as consumer spending rises at a slower rate, according to the median estimate of 56 economists surveyed by Bloomberg News this month. Household spending, which accounts for about 70 percent of the economy, may grow at a 2.8 percent rate compared with a 6.6 percent increase last quarter that was the biggest since the third quarter of 1997.
Source: Bloomberg

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