Productivity Gains Highlight Churn of Pandemic Economy

US President Donald Trump holds a bag during a visit to the new Louis Vuitton factory in Alvarado (40 miles south of Fort Worth), Johnson County, Texas on October 17, 2019. - A workshop of the French brand Louis Vuitton will be inaugurated in Texas by Donald Trump, in the …
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U.S. productivity increased at a healthy 4.6 percent pace in the July-September quarter, the Labor Department reported Tuesday.

That was below the 4.9 percent preliminary estimate for labor productivity, which measures hourly output per worker. Productivity had surged at a 10.6 percent rate in the second quarter.

Productivity has a tendency to rise in economic downturns when employment declines faster than output. The precise reasons for this are debated by economists but are likely a combination of employers attempting to winnow less productive workers from their payrolls and workers putting in more effort in hopes of keeping their jobs.

Over the last four quarters, nonfarm business productivity increased 4.0 percent, reflecting a 3.4-percent decline in output and a 7.1-percent decline in hours worked.

Productivity gains can be a major contributor to prosperity when they are made alongside output gains and tight labor markets. When the gains come along with rising unemployment and falling output, they can contribute to rising inequality and may not improve quality of life for many Americans.

The 4.6 percent increase in productivity in third-quarter 2020 results from the largest gains in both the output—43.4 percent—and the hours worked—37.1 percent— series, which begin in 1947. These enormous gains reflect the rebound from crash in output and hours worked during the lockdown in the end of the first quarter and start of the second quarter. In the second quarter, output fell 36.8 percent and hours worked dropped 42.9 percent, the largest declines in both series.

Manufacturing sector labor productivity increased at a 19.9 percent annual rate as output increased at a 56.2 percent annual rate and hours worked increased at a 30.3 percent annual rate, the largest increases ever recorded. In the quarter prior, productrivity, output, and hours worked all saw record declines.

Durable goods manufacturing has been an important source of strength for the economy during the rebound. It was responsible for the majority of the 19.9-percent total manufacturing  productivity increase, as it saw an increase in productivity of 47.0 percent, reflecting a 99.8-percent  increase in output and a 35.9-percent increase in hours worked. The sharp increase was driven by motor vehicle production coming back online after being shutdown earlier in the year.

Labor costs fell at a 6.6 percent rate in the third quarter, a downward revision from the 8.9 percent decline estimated a month ago.  This came about as the combined effect of a 2.3 percent decrease in hourly compensation and the 4.6 percent increase in productivity.

The chaotic churning of the economy is especially evident in the measure of unit labor costs in manufacturing, which measure how much labor is expended for each unit of output. This soared 44.8 percent in the second quarter, the largest ever jump, as manufacturing output crashed faster than employment. In the third quarter, unit labor costs fell 12.1 percent as production ramped back up.

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