Implications: Productivity fell unexpectedly in the second quarter. But Q1 productivity was revised upwardly to 3.9% growth from 2.8%. Total non-farm output fell in the second quarter, while the number of hours worked rose. Some may fret that productivity has reached a plateau. We look at it as a pause. Hours worked have increased in each of the past three quarters, yet productivity has still grown at a 3.0% annual rate. As output rebounds, technology will continue to work its magic, allowing each and every worker to accomplish more. Longer-term trends paint the picture. Productivity in the past year has accelerated to a 3.9% annual rate from a 2.5% rate the year before. Unit labor costs – how much companies have to pay workers per unit of production – are down 2.8% in the past year. This means it is more profitable for companies to expand operations and boost hours worked. In the manufacturing sector, productivity grew 4.5% at an annual rate, and is up at a 7.5% rate from a year ago. Durable manufacturing productivity rose at an astounding 11.2% annual rate, while unit labor costs fell at an 11.4% annual rate. We view this as a benefit of the restructuring of the auto industry. While restructuring is a painful process for the individual people involved (auto workers and union members who lose jobs or see pay reduced), the economy benefits immediately. Productivity improvements free up resources to be used in other sectors. As long as government does not squander these gains, by taxing them away, or redistributing borrowed funds, the benefits will outweigh the costs. The same will be true as cuts occur in state and local government. There will be a benefit that helps offset the cost.
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