Q2 Productivity & Costs:  Productivity Jumps But Trend Steady

Bottom Line: The preliminary reading on 2nd Quarter productivity showed a sharp increase as output rose sharply and compensation growth moderated. There was a one-off decline in unit labor costs in 2Q but positive revisions to 2017 labor cost data. On a trend basis, compensation is rising at a pace only slightly slower than output growth, suggesting a more modest productivity trend. Nonfarm Business Productivity ROSE by 2.9% in 2018 Q2, compared with market expectations for an increase of 2.4%. Productivity is now 1.3% ABOVE its year ago level; by comparison, coming out of the recession in 2009 Q4, productivity was a robust 5.6% ABOVE its year earlier level. This is a typical post-recession pattern with productivity soaring in the late recession/early recovery period before settling back to a more sustainable pace as the expansion lengthens. Output ROSE by 4.8%, in line with the Q2 increase in nonfarm business GDP. With its recent gains, output is now 3.5% ABOVE its year ago level. Hours Worked ROSE by 1.9% because of the solid gains in private employment and a steady workweek. Hours worked are now 2.2% ABOVE their year ago level. Compensation ROSE by 2.0% and is now 3.2% ABOVE its year ago level. Quarterly compensation has been quite volatile in recent years but the trend turned higher in 2017. Unit Labor Costs FELL by 0.9%, compared with market expectations for no change. Unit labor costs are now 1.9% ABOVE their year ago level.