2007 Third Quarter (Preliminary) Productivity and Costs

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Third Quarter 2007, preliminary

The Bureau of Labor Statistics of the U.S. Department of Labor today reported preliminary productivity data--as measured by output per hour of all persons--for the third quarter of 2007. The preliminary seasonally- adjusted annual rates of productivity growth in the third quarter were:

5.3 percent in the business sector and 4.9 percent in the nonfarm business sector.

In both sectors, the productivity gains were the largest since the third quarter of 2003, and reflected 4.3 percent per year growth in output combined with small declines in hours worked (See table A).

In manufacturing, productivity increases in the third quarter were:

4.6 percent in manufacturing, 5.7 percent in durable goods manufacturing, and 4.1 percent in nondurable goods manufacturing.

Manufacturing productivity grew faster in the third quarter than it had one quarter earlier. In the second quarter of 2007, a 2.4 percent gain in overall manufacturing productivity reflected a 5.2 percent increase in durable goods output per hour and a 0.8 percent decline in nondurable goods productivity, as revised. Output and hours in manufacturing, which includes about 12 percent of U.S. business sector employment, tend to vary more from quarter to quarter than data for the aggregate business and nonfarm business sectors. Third-quarter measures are summarized in table A and appear in detail in tables 1 through 5.

The data sources and methods used in the preparation of the manufacturing series differ from those used in preparing the business and nonfarm business series, and these measures are not directly comparable. Output measures for business and nonfarm business are based on measures of gross domestic product prepared by the Bureau of Economic Analysis of the U.S. Department of Commerce. Quarterly output measures for manufacturing reflect indexes of industrial production independently prepared by the Board of Governors of the Federal Reserve System. See Technical Notes for further information on data sources.

Business

From the second quarter to the third quarter of 2007, labor productivity in the business sector increased 5.3 percent, the largest gain since the third quarter of 2003, when it increased 9.1 percent (seasonally adjusted annual rates). Output per hour had increased 3.6 percent in the second quarter, as revised. Output grew at about the same rate in the second and third quarters of 2007--4.4 percent and 4.3 percent, respectively--but productivity grew faster in the third quarter because hours fell 0.9 percent, compared to a 0.8 percent increase one quarter earlier (tables B and 1). The third-quarter hours decline was the first in the business sector since the second quarter of 2003, when hours fell 2.2 percent. From the third quarter of 2006 to the third quarter of 2007, productivity increased 2.5 percent, matching the trend rate of productivity growth for the 1947-2006 period covered by the measure.

Hourly compensation in the business sector increased at an annual rate of 5.1 percent during the third quarter of 2007, slower than the 5.8-percent rise in the second quarter (as revised). This measure includes wages and salaries, supplements, employer contributions to employee benefit plans, and taxes. Real hourly compensation, which takes into account changes in consumer prices, rose by 3.1 percent in the third quarter of 2007.

Changes in unit labor costs are approximately equal to changes in hourly compensation less changes in productivity. In the third quarter of 2007, unit labor costs declined 0.2 percent as hourly compensation increased 5.1 percent and productivity increased more, 5.3 percent. Unit labor costs had increased 2.2 percent in the second quarter, and 5.3 percent in the first quarter, of 2007. The implicit price deflator for business sector output was unchanged in the third quarter of 2007 following a 2.2 percent increase in the second quarter.

Nonfarm business

Productivity grew 4.9 percent in the third quarter of 2007 as output grew 4.3 percent and hours worked declined 0.5 percent. After revision, output per hour increased 2.2 percent in the second quarter, as output growth of 4.2 percent was partially offset by a 2.0 percent increase in hours worked (table 2). The third-quarter productivity increase was the largest since a 10.4 percent increase in the third quarter of 2003. Nonfarm business productivity increased 2.4 percent over the last four quarters, more than the 1.0 percent increase in calendar year 2006, and approaching the 2.7 percent average from 2000 to 2005.

Nonfarm hourly compensation increased at a 4.7 percent annual rate in the third quarter of 2007. When the rise in consumer prices is taken into account, real hourly compensation rose 2.7 percent during the third quarter, after falling 1.5 percent in the second quarter.

Unit labor costs in the nonfarm business sector edged down 0.2 percent during the third quarter of 2007, after rising 2.2 percent in the second quarter. The implicit price deflator for nonfarm business output also declined in the third quarter of 2007, by 0.4 percent.

Manufacturing

Productivity increased 4.6 percent in manufacturing in the third quarter of 2007; output grew 4.3 percent and hours of all persons fell 0.4 percent (seasonally adjusted annual rates). In durable goods industries, productivity increased 5.7 percent on the strength of 6.6 percent output growth that was partially offset by a 0.8 percent rise in hours worked. Productivity increased 4.1 percent in nondurable goods in the third quarter, but in this sector a 2.4 percent decrease in hours contributed more to the productivity gain than a 1.6 percent increase in output (tables 3, 4, and 5). The 2.7 percent increase in total manufacturing productivity from the third quarter of 2006 to the third quarter of 2007 is smaller than the 4.2 percent average annual rate of productivity growth from 2000 to 2006.

The hourly compensation of manufacturing workers increased 2.3 percent during the third quarter of 2007, with a 1.2 percent gain in the durable goods subsector and a 4.3 percent gain in nondurable goods industries. Hourly compensation in total manufacturing had increased 3.7 percent in the second quarter. When the increase in consumer prices is taken into account, real hourly compensation increased 0.4 percent in the third quarter.

Unit labor costs in manufacturing fell 2.2 percent in the third quarter of 2007, reflecting a decline of 4.3 percent in durable goods industries and a 0.2 percent increase in nondurable goods industries. In the overall manufacturing sector, these costs had increased 1.3 percent in the previous quarter. Unit labor costs have increased 4.4 percent since the third quarter of 2006--the largest four-quarter increase since the period ending in the fourth quarter of 2000, when they increased 5.2 percent.

Revised Measures

Revised and previous measures for the second quarter of 2007 for the business, nonfarm business, and manufacturing sectors are compared in table B. In the business sector, similar downward revisions to output and hours resulted in a revised productivity increase of 3.6 percent, about the same as reported Sept. 6. In the nonfarm business sector, output was revised down by more than hours, and productivity growth was revised down to 2.2 percent. In the manufacturing sector, productivity was revised up due to an upward revision to output and a small downward revision to hours.

Second quarter 2007

In all three sectors, hourly compensation was revised up by 0.3 percentage point. In the business and nonfarm business sectors, unit labor costs rose more than previously reported. Because manufacturing output per hour was revised up by more than compensation per hour, unit labor costs were revised downwards.

Hours worked during the second quarter in all sectors now reflect more current data on the ratios of hours worked to hours paid in private nonfarm businesses.

Revised measures: Nonfinancial Corporations

Productivity and cost measures for nonfinancial corporations for the second quarter of 2007 also were revised to incorporate more recent information than was available on Sept. 6.

Second quarter 2007

Productivity rose 3.8 percent in the second quarter of 2007, compared with the preliminary estimate of a 3.5 percent increase. This was the result of a downward revision in hours growth, from 1.0 percent to 0.8 percent; output growth was unchanged. Unit labor costs were not revised, as an upward revision to hourly compensation was offset by the upward revision to productivity (tables C and 6).