US productivity growth beats expectations, lowering business labor costs

US worker productivity grew faster than expected in the third quarter, lowering labor costs and supporting the view that the labor market was not a source of inflation.‌^[1] Productivity measures output per hour worked: when it improves, businesses need fewer working hours to produce the same amount of goods or services.

The productivity improvement eased businesses' labor-cost pressure.‌^[1] For companies achieving those efficiency gains, even rising wages can coexist with lower wage costs per unit of output. That gives them room to preserve profit margins or slow price increases; competition and pricing decisions determine how much reaches customers.

If sustained, that improvement could reduce labor-driven inflation and ease pressure on the Federal Reserve to keep interest rates high. On November 5, two-year Treasury yields stood at 4.46%, down 12 basis points from the previous session, while ten-year yields fell 6 basis points to 4.84%; one basis point is 0.01 percentage point. Those moves alone do not establish that the productivity report caused yields to fall. Persistently lower benchmark yields could support borrowing-dependent businesses and customers if they feed through to loan rates.

Impact

• Businesses with large labor billsOpportunity

  Companies that raise output per hour gain room to protect profits after paying wages or compete through slower price increases. Rivals may face pricing pressure, but the economy-wide improvement does not establish equal efficiency gains at every business.^[1]

• Housing and other rate-sensitive businessesOpportunity

  If easing labor-cost pressure helps bring loan rates down, homebuyers and other credit-dependent customers could afford more, supporting demand. The benefit depends on continued inflation improvement and an actual decline in borrowing costs.^[1]

What to watch next

• October average hourly earnings, due November 6, will test whether wage pressure remains contained; the estimate is 0.3% monthly growth, up from 0.1% previously.
• October core consumer prices, due November 10, will test whether broader price pressure is easing; prices excluding food and energy are expected to rise 0.2% monthly, down from 0.3%.