Improving GDP aids productivity

The improvement in GDP from Q2 to Q3 helped to lift nonfarm productivity in Q3 by an annual rate of 1.9%, that’s up from a -1.8% in Q2.  The increase comes as output rose by 3.0% while hours were were up just 1.9%.


The improvement in productivity resulted in a 0.1% decline in unit labor costs, as productivity grew 1.9% while hourly compensation increased 1.8%.


As chart 1 from the BLS reveals, rising output, without the accompanying increase in hours worked (job growth) has had a very favorable impact on productivity growth.  This is normal during the early stages of an economic recovery since employers are reluctant to boost hiring amid worries that improving conditions may be temporary.

This time around, the uncertainty swirling around the economy has exacerbated the conditions that have led to a lack of employment growth.

Data give Fed room to maneuver
Rising productivity and the lack of meaningful wage gains have kept unit labor costs well under control – see chart 2.  The absence of higher unit labor costs, coupled with weak overall demand, has kept inflation very low, giving the Fed plenty of wiggle room to embark on its latest round of bond buys.

However, the Fed must carefully plan its eventual exit strategy.  Too soon of a withdrawal of the extra liquidity could send the economy into a tailspin.  Wait too long and the U.S. economy experiences high inflation.