US Q3 productivity growth hits 3.6%, beating 2.8% estimates

• Productivity had increased 1.4% in the prior quarter.
• Unit labor costs declined 0.7%, while the forecast had been for a 0.6% rise.
• The previous quarter's unit labor costs had grown 1.2%.

At first glance, these figures appear strongly disinflationary, but policymakers tend to dismiss them because of their well-known volatility and measurement difficulties.

The US Bureau of Labor Statistics releases its Productivity and Costs report every quarter. A preliminary version comes out about five weeks after the quarter ends, followed by a revised estimate roughly a month later that includes updated GDP and labor market figures.

The key metric is labor productivity in the nonfarm business sector, which is output per hour worked. It is presented as an annualized quarterly rate and as a year-over-year change. Output is taken from GDP after removing government, households, nonprofits, and farms; hours are drawn from BLS employment surveys. Productivity growth is the principal long-term determinant of living standards, as it sets the limit on how much incomes can rise without sparking inflation.

Unit labor costs reflect the compensation businesses pay for each unit of output. They are computed as hourly compensation divided by productivity. When wages outpace productivity, unit labor costs rise, which can squeeze profit margins or lead companies to raise prices. For this reason, the measure is a key factor in assessing the inflation outlook and in the Fed's evaluation of whether wage growth is consistent with its 2% inflation target.

The report also provides data for manufacturing and nonfinancial corporations, along with hourly compensation and real hourly compensation.

The quarterly readings are noisy and subject to large revisions, especially when GDP and compensation data are updated. That is why economists tend to look at multi-quarter and annual patterns. The release rarely influences markets, but productivity has attracted renewed scrutiny as investors and policymakers seek evidence that artificial intelligence is increasing output per worker and enabling faster growth without extra inflation.