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Productivity: Higher in 2Q Final Revision

September 3, 2020

Bottom Line: Productivity was revised up nearly 3 points to 10.1% in Q2. Hours worked were roughly unchanged, but the lost output was less damaging than initially reported, as we saw with the revisions to Q2 GDP. Still, hours worked dropped at a stunning 42.9% annualized rate while output fell over 37%, mathematically pushing productivity higher as the economy produced more per hour worked. Overall compensation rose thanks to increased pay for many essential workers during the shutdowns. Unit labor costs, the ratio of hourly compensation to labor productivity, were revised lower from 12.2% to 9%, still massively above the pre-pandemic trend rate of about 1.5%. Overall, the economy produced more per hour worked but with a historically unprecedented contraction in hours worked amid the shutdowns for the novel coronavirus. Longer-term, the trend rate of productivity may reset modestly higher as the pandemic forced businesses to automate and operate with leaner workforces.

Nonfarm Business Productivity was REVISED UP by 2.8 percentage points and increased by 10.1% in 2020 Q2, compared with market expectations for a downward revision to a decline of 2.7%.

This revision lifted the year-on-year growth rate of labor productivity at 2.8%.
Output was revised modestly higher, from -38.9% to -37.1%, reflecting the recent adjustment in 2020 Q2 nonfarm business GDP.

Hours Worked was revised up to -42.9% from -43.0%, reflecting the recent revisions to employment. Compensation was revised modestly lower, from 20.4% to 20.0%. Over the past year, compensation has risen by 7.8%. As a result of these adjustments, Unit Labor Costs were REVISED DOWN from 12.2% to 9.0%. Over the past year, unit labor costs have increased by 4.9%.

Article by Contingent Macro Advisors