Fourth Quarter 2013 Productivity and Costs

The Bureau of Labor Statistics’ measure of U.S. productivity continued to improve as 2013 came to a close. The annualized statistic grew by 3.2 percent; this follows the third quarter improvement of 3.0 percent. Hourly compensation increased by 1.5 percent, but unit labor costs fell on an annualized basis during the final three months of the year.

Productivity measures the amount of output in goods and services the American economy creates per hour of labor. During the quarter, output increased by an annualized 4.9 percent, and it only took 1.7 percent more hours to create the additional production. For all of 2013, the productivity increased by 1.7 percent as output and hours worked grew by 3.3 percent and 1.6 percent respectively. Unit labor costs in nonfarm businesses dropped by 1.6 percent. In aggregate, it is costing firms less to produce a unit of output than in the prior quarter. This occurred because at 1.5 percent, hourly compensation grew slower than productivity. In all of 2013, unit labor costs fell by 1.3 percent.

This is a very encouraging indicator. It suggests the economy was firmly growing as the year ended and that inflation, barring an exogenous shock to raw materials, should remain tame. Firms are producing units of their wares for less because of increasing productivity all while wages see some improvement. This indicator makes Atlas feel like some economic weight has been lifted. (by C.Cox)