U.S.'s 3.1% Productivity Rise in Third Quarter Bodes Well for Corporate Earnings

Just when you think the United States economy is about to tip back into a recession -- the dreaded double-dip -- up pops the unexpected -- modestly encouraging economic news, in the form of worker productivity and unit labor costs.

U.S. worker productivity surged an unexpected 3.1 percent in the third quarter, the U.S. Labor Department announced Thursday, as companies continued to find ways to increase output despite essentially the same workforce. A Bloomberg News economists survey had expected third quarter productive to increase 2.5 percent.

What's more, productivity dipped 0.1 percent in the second quarter and is running at a 1.1 percent rate over the past 12 months.

The significance of the above? Rising productivity is one factor that will help keep the U.S. economic expansion in-place. To be sure, productivity can't do it alone - it needs help from exports, business investment, and household formation -- but productivity can move the GDP needle.

Productivity: An Indicator of Economic Strength

Productivity measures output per hour worked. Economists say rising productivity usually leads to increases in income, as businesses can increase salaries/wages paid without increasing their per unit costs. While quarterly productivity statistics are important, most economists focus on the longer, 12-month trend, as it's more indicative of overall efficiency and output strength.

U.S. productivity averaged about 2.7 percent during the 1948-1970 period, then slumped to 1.6 percent in 1971-1995 period. However, starting in 1995 the technology revolution driven by the personal computer, microprocessor, and the Internet, among other breakthroughs, propelled a large increase in productivity to about 2.5 percent per year. The remarkable productivity rate helped create the record earnings and rising real, median incomes that characterized the Roaring 90s.

Meanwhile, unit labor costs fell 2.4 percent in the third quarter, after a 2.8 percent increase in the second quarter. The Bloomberg survey had expected unit labor costs to fall 0.7 percent in the third quarter. The larger-than-expected decline reveals continued discipline by companies large and small, regarding costs. Stung by sluggish sales during the Great Recession, businesses became ever-over-vigilant -- essentially shifting to perpetual belt-tightening mode which looks continually for ways to save on expenses.

Fed: Economy Still Underperforming

The above data, and in particular the productivity improvement, will help chase away the double-dip recession fears, however that does mean the U.S. is out of the woods yet regarding a self-sustaining economic expansion -- far from it.

Moreover, the Fed expressed as much Wednesday, when it kept short-term interests the same, and maintained its current stance on both its conventional monetary policy (short-term rates) and unconventional policy (quantitative easing).

Another expression of the economic recovery's unsatisfactory performance, to-date: the Fed also slashed its GDP growth forecast, increased its unemployment rate projection and also said it was considering the possibility of additional quantitative easing to jump-start GDP growth.

U.S. Federal Reserve Chairman Ben Bernanke said the central bank was closely monitoring events and developments in Europe at the G-20 meeting of the world's developed nations, to evaluate whether new events have strained the U.S./global economy further.

The Fed also lowered its U.S. 2011 and 2012 GDP growth forecasts to 1.6 percent to 1.7 percent and 2.5 percent and 2.9 percent; from 2.7 percent to 2.9 percent and 3.3 percent to 3.7 percent, respectively, in its June projection.

The Fed now also sees the U.S. unemployment falling to 9.0 to 9.1 percent in 2011; and 8.5 to 8.7 percent in 2012; those are upward revisions from 8.6 to 8.9 percent and 7.8 to 8.2 percent, in its June projection.

Economic Analysis: A double-dip recession is not likely, barring a European debt market collapse, but the U.S. economy is far from healthy, as the Fed outlined, in so many words, in its Wednesday statement and forecast.

The Fed knows that the pace of job growth at this stage of the economic recovery is unacceptable and more must be done to rev-up both GDP growth and job growth. The Fed can't enact fiscal policy -- that's the job of the U.S. Congress -- but it underscored Wednesday that the central bank remains at-the-ready to increase quantitative easing to help increase demand, if economic conditions deteriorate.

With the above as backdrop, the view from here argues that 2012 U.S. GDP growth and job growth will exceed expectations.