Q3 productivity rises below forecast

Nonfarm business sector labor productivity increased 4.6 percent in the third quarter of 2020, the U.S. Bureau of Labor Statistics reported today, as output increased 43.4 percent and hours worked increased 37.1 percent. (All quarterly percent changes in this release are seasonally adjusted annual rates, and show what the percent change would be if the quarterly rate continued for four quarters.) The 4.6-percent gain in productivity in the third quarter follows an increase of 10.6 percent during the second quarter. Over the last four quarters, nonfarm business productivity increased 4.0 percent, reflecting a 3.4-percent decline in output and a 7.1-percent decline in hours worked.

Unit labor costs in the nonfarm business sector decreased at an annual rate of 6.6 percent in the third quarter of 2020, the combined effect of a 2.3-percent decrease in hourly compensation and the 4.6-percent increase in productivity. The third-quarter decline in unit labor costs followed three consecutive quarterly increases, and nonfarm business unit labor costs increased 4.0 percent over the last four quarters.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked by all persons, including employees, proprietors, and unpaid family workers. The 4.6-percent increase in productivity in third-quarter 2020 results from the largest gains in both the output (43.4 percent) and the hours worked (37.1 percent) series, which begin in 1947. In contrast, the 10.6-percent gain in nonfarm business labor productivity in second-quarter 2020 reflected a decline in output of 36.8 percent and a decline in hours worked of 42.9 percent--the largest declines in both series. Overall, the output and hours worked index levels remain below their levels in the fourth quarter of 2019, the last quarter before the coronavirus (COVID-19) pandemic began. Output and hours worked remain 4.0 percent and 7.4 percent below their fourth-quarter 2019 levels, respectively.

Manufacturing sector labor productivity increased at a 19.9 percent annual rate in the third quarter of 2020 as output increased at a 56.2 percent annual rate and hours worked increased at a 30.3 percent annual rate. These series-high increases in the third quarter of 2020 follow the largest decreases in these three measures in the second quarter, when total manufacturing productivity fell 14.0 percent, output dropped 46.5 percent, and hours worked fell 37.8 percent. As of the third quarter of 2020, output remains 5.7 percent below its fourth-quarter 2019 index level, while hours worked is 6.8 percent lower.

Durable goods manufacturing was responsible for the majority of the 19.9-percent total manufacturing productivity increase, as it saw an increase in productivity of 47.0 percent, reflecting a 99.8-percent increase in output and a 35.9-percent increase in hours worked. The sharp increase in durable manufacturing output in the third quarter was driven by motor vehicle production. Non durable goods manufacturing productivity increased 0.7 percent in the third quarter of 2020, as output increased 22.6 percent and hours worked increased 21.8 percent.

Unit labor costs in the total manufacturing sector decreased 12.1 percent in the third quarter of 2020, the largest decline since the first quarter of 2010, when the measure fell 13.0 percent. The third-quarter decrease followed a 44.8-percent increase in unit labor costs in the second quarter of 2020, the largest increase in the series. Unit labor costs increased 8.9 percent from the same quarter a year ago. Total manufacturing sector productivity increased 1.0 percent over the last four quarters, as output decreased5.8 percent and hours worked decreased 6.7 percent