U.S. productivity growth falls in Q3 2019

U.S. productivity growth came in considerably below consensus expectations in the third quarter. On a quarter-on-quarter basis, productivity growth fell 0.3 percent, as compared with consensus expectations of a rise of 0.9 percent. The miss compared to expectations was due to stronger-than expected rebound in hours worked. The BLS showed that self-employed hours made an unusually large contribution to growth in the third quarter. This is also one of the more volatile parts of hours worked.

The huge rise in self-employed hours added around 2pp to overall hours worked in the third quarter. Without this spike, hours worked would have likely not been such a large drag on overall productivity growth and third quarter productivity might have been positive, noted Barclays in a research report. However, self-employed hours recorded unusually large falls in the first quarter and second quarter, which would have impacted the productivity estimates in the opposite direction.

On a year-on-year basis, productivity rose 1.4 percent, which is slightly stronger than the average pace in the current expansion but slower than earlier in the year. Throughout the rebound, productivity growth had been soft, increasing on average 1 percent year-on-year, about 100 basis points below its historical norm.

“In recent quarters, it had accelerated, but the Q3 report calls this latest acceleration into question and suggests that productivity growth may be improving at a more modest rate than data earlier in the year suggested”, said Barclays.

Unit labor costs rose 3.6 percent quarter-on-quarter and 3.1 percent year-on-year.

“A gradual shift toward faster productivity growth would be consistent with an improvement in the prospects for potential output, wage growth, and spare capacity for the US economy. These, in turn, could imply that there is room for growth and labor markets to improve further without causing undue inflationary pressures on firms and consumers”, added Barclays.