Productivity soars

Led by a 13.6% rise in manufacturing productivity, the largest since the series began back in 1987, nonfarm business productivity soared at an annualized rate of 9.5% in 3Q, according to preliminary data. Unit labor costs, which are heavily influenced by productivity, fell a steep 5.2% in 3Q.

Forecasts provided by Bloomberg News called for a 6.3% increase in productivity and a 3.9% decline in unit labor costs.

Notably, unit labor costs declined 3.6% over the last four quarters—the largest decrease since the series began in 1948, according to the government. With labor costs, which are the largest piece of the expense equation for most businesses, well under control, the risk of an unwanted rise in inflation is highly unlikely.

No real surprises despite the big miss by forecasters

Huge gains in productivity and corresponding declines in unit labor costs are to be expected in the early stages of an economic recovery because firms are reluctant to add new workers even as production pick up. And in this case, the continuation in job losses added to the out-sized increases in productivity.

As layoffs wind down and hiring picks up (as many analysts anticipate will eventually occur), productivity gains will eventually begin to slow.