Worker Productivity Drops, Costs Rise

Hours worked increased faster than output in the third quarter, pulling down nonfarm productivity by an unexpected 0.3 percent. More hours worked relative to output also points to higher unit labor costs which increased at a higher-than-expected 3.6 percent rate in the quarter. Compensation per hour rose 3.3 percent in the quarter.

Manufacturing has been this year's economic weak spot and labor productivity for this sector edged 0.1 percent lower in the third quarter which, however, is a big improvement from the second quarter's 2.4 percent drop. Output in manufacturing increased 1.1 percent in the latest quarter yet was outmatched by a 1.3 rise in hours worked. Compensation in manufacturing rose at a 3.5 percent rate with unit labor costs up 3.6 percent.

Productivity improves when increases in output outmatch increases in hours, which was not the case in the third quarter, a period of subdued demand. Slowing demand unfortunately is an ongoing risk that may extend to the fourth quarter, in what would be a possible negative for both productivity and the cost of labor.