United States: Third-Quarter Productivity Growth Revised Up to 4.7%

Productivity for nonfarm businesses soared 4.7% in the third quarter, instead of the 4.1% initially reported by the Bureau of Labor Statistics (BLS). An upward revision to output accounted for the change. The BLS also revised hourly compensation growth from 3.6% to 3.7%. With productivity revised up more than costs, the drop in unit labor costs during the third quarter was revised down from 0.5% to 1.0%. The BLS also revised the estimated second-quarter increase in hourly compensation from 4.0% to 0.9%. As a result, unit labor costs for the second quarter were revised down from a 1.8% gain to a 1.2% decline.

The BLS also reported that the productivity of nonfinancial corporations grew 3.2% in the third quarter. More significantly, it revised down its estimated second-quarter gain from 6.3% to 4.3%. In a July speech, Alan Greenspan admitted that he was puzzled over why the nonfarm and nonfinancial productivity estimates were telling vastly different stories about productivity growth. The second-quarter revisions and the third-quarter estimates bring the two measures closer together.

The latest estimates will revive talk about the long-run direction of productivity, since the course of monetary policy hinges on this issue. One can point to several strands of evidence that add up to a productivity pickup. First, the numbers speak for themselves. Four years into an expansion, to nearly everyone's surprise, productivity is growing 3.1% year-on-year. Even Ben Bernanke misread the productivity potential of the economy when he said in a February 24 speech that " Cyclical factors tend to unwind, however; and so, looking ahead a couple of quarters, say, to the second half of 2005, we can reasonably assume that productivity growth will approach its secular trend." Second, computer prices are once again dropping at double-digit rates. Prices of communications equipment are also falling faster than they did in 2004. These quicker declines are associated with efficiencies in producing high-tech hardware. But the drops are also one reason why the share of business spending on high technology is rising, which is contributing to productivity growth. A third sign that productivity growth has picked up is that the second measure of productivity, that of nonfinancial corporations, has grown much faster than nonfarm productivity over the past two years (although it grew slower in the third quarter). Usually, these two measures climb in synch, since they are based on independent measures of production (one measure is based on GDP, the other on income). In comparing the measures, it is important to keep in mind that one is not superior to the other. So, if the truth is in the middle, the nonfarm productivity numbers are understating actual productivity growth.

The direction of monetary policy hinges on trend productivity growth. Should the Federal Reserve conclude that productivity growth has picked up, it will pursue a looser monetary policy than it would if productivity were slowing. Productivity growth in the fourth quarter is likely to come in around 2.5–3.0%, which is higher that the 2.2% average of the past 50 years.