US productivity gain is biggest in six years

Jeff Roberson/AP/File
Derek Jenkins, an employee at Baldor Electric Co., moved a large roll of steel inside the company's factory in St. Louis. US productivity productivity soared 6.4 percent last quarter, its best showing in six years.

US productivity soared in the second quarter, marking its biggest quarterly rise since 2003 and signaling that corporations are getting leaner than ever.

The key question is: Does all this cost-cutting mean bigger corporate profits immediately ahead? So far, it's mostly helped companies cope with falling sales.

For the second quarter, nonfarm business productivity jumped at an annual rate of 6.4 percent over the first quarter, the Labor Department reported Tuesday. That was better than many analysts had forecast and much better than the revised 0.3 percent growth in the first quarter.

But it didn't indicate a real turnaround yet. Nonfarm businesses' output continued to fall in the second quarter at an annual rate of 1.8 percent compared with the first quarter. Productivity – a measure of companies' output versus their inputs – rose anyway because firms slashed their inputs even more.

Some of their biggest cuts came in labor costs. From the first quarter to the second quarter, firms cut their workers' hours at an annual rate of 7.6 percent (seasonally adjusted), according to the Labor Department. Compensation in the second quarter barely edged up at all.

Those figures suggest that the contraction is slowing, since output and hours fell even more in the first quarter. Eventually, better productivity will lead to a recovery. But it may take some time.

"In normal circumstances, we might argue that decline [in labor costs] is good for profitability and, consequently, equities as well," wrote Paul Ashworth, an economist with Capital Economics, in an analysis. "With demand as weak as it is, however, we can't see the fall in costs translating into fatter profit margins (or thinner losses). Instead, we suspect that the decline in wage costs will lead to a decline in prices, which is exactly the sort of downward wage-price spiral the Fed will be desperate to avoid."

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