US DATA
The Q3 nonfarm productivity / unit labor costs report shows a somewhat concerning acceleration in unit labor costs and compensation, with upward historical revisions to productivity not enough to offset the near-term inflationary implications.
- Preliminary nonfarm business productivity rose just 2.2% Q/Q ann (vs 2.5% expected) in Q3, with Q2 revised down 0.4pp to 2.1%. Correspondingly, ULCs rose 1.9% in Q3 (1.0% expected), with a large upside revision to Q2 (to 2.4% from 0.4%). One silver lining was that while ULCs were upped in Q2 by 2.0pp (reflecting a 1.6pp upward revision to hourly compensation and 0.4pp lower productivity), this was largely driven by manufacturing, with nonfinancial corporate sector productivity overall rising 3.1% in the quarter vs the previously-recorded 0.3% decrease.
- Even so, ULCs have started to re-accelerate per the latest data: 3.4% Y/Y in Q3, the fastest clip since Q4 2022. Productivity has started to slow meanwhile (2.0% Y/Y in Q3, slowest since Q2 2023).
- Meanwhile real hourly compensation has picked up in 2024 as a whole, reaching 2.8% Y/Y in Q3, vs negative figures for 2023 and 2022 as a whole.
- Revisions mean that coming into 2023, the starting level of Unit Labor Costs was lower than previously expected. As the table below from the BLS report shows, Labor productivity was revised up in each of 2021/2022/2023 alongside higher output and softer hourly compensation in the cases of 2022-23: ULCs correspondingly were revised down across each of those three years. (Increased output estimates were expected due to September's NIPA national accounts revisions.)
- While Fed Chair Powell noted in September that the upward revisions to domestic output/income alleviated perceived downside risks to the economy, the stronger-than-expected improvement in real compensation suggests strong underpinnings for household demand, with higher ULCs a headwind to the disinflationary process.
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