Some major insight explaining how second quarter earnings performed so well was released this morning. A Labor Department report said productivity rose by its most rapid rate in six years during the second quarter, while labor costs were slashed by the largest cut in nine years, owing to mass layoffs and little pressure on wages.
Productivity per labor hour in the nonfarm business sector advanced at a rate of 6.4% between April and June ― the fastest gain since Q3 2003 ― while unit labor costs fell 5.8%.
Analysts had expected productivity to advance just 5.5%, while unit labor costs, instead of plunging, were expected to grow 3.0%.
“The increases in productivity in all manufacturing sectors were the result of hours falling faster than output,” the Labor Dept. said.
Labor costs slipped as companies slashed payrolls, pushing the unemployment rate to a 26-year peak of 9.5% in June. With workers just hoping to keep their jobs there was scant pressure on getting a raise, as hourly compensation rose just 0.2%. Once inflation is taken into account, real hourly compensation actually shrunk by 1.1%.
Joseph LaVorgna, chief US economist at Deutsche Bank, called the report “stronger than expected,” adding it to the list of new data confirming that the recession is in its final throes.
“This is typical toward the end of recessions, when demand is recovering but producers are slow to increase the size of their labor force,” he said.
Overall, output fell at an annualized rate of 1.7%, while hours worked declined at a far faster pace of 7.6%.
Payrolls fell at their slowest rate in 11 months in July and jobless claims were turning lower over the past few weeks, so there should be extra attention on Thursday’s weekly labor report to watch for continued improvement.