On The Other Hand...

[otterinbham 0]

Yeah, yeah, I know this isn't as exciting as nuking Tehran or Tabriz to some of you guys, but it's still pretty great stuff.

http://www.marketwatch.com/news/story/prod...E2D6FF0608E4%7D

Productivity revised to 6.3%, best in four years

Unit labor costs fall 2% in third quarter, signaling low wage inflation

By Rex Nutting, MarketWatch

Last update: 12:33 p.m. EST Dec. 5, 2007

WASHINGTON (MarketWatch) -- Fast growth in the third quarter translated to the strongest productivity gains in four years, the Labor Department reported Wednesday.

Productivity in the nonfarm business sector increased at a 6.3% annual rate in the quarter, the government said in its second estimate of productivity. A month ago, the government said productivity rose 4.9% annualized. Read the full report.

Unit labor costs, a key gauge of inflationary pressures from wages, were revised much lower, showing a 2% annual decline in the third quarter compared with a 0.2% drop estimated a month ago.

Unit labor costs in the second quarter were also revised much lower, from a 2.2% gain to a 1.1% decline, reflecting more up-to-date compensation information.

The revised data show inflationary pressures from tight labor markets are much milder than previously believed, giving Federal Reserve officials more cover to cut interest rates without fearing that inflation could spike higher.

"The large revisions are good news on inflation, but are only temporary, given the current slowdown," wrote Augustine Faucher, an economist for Moody's Economy.com. The stellar productivity and unit labor cost figures could easily reverse in the current quarter, with economists expecting growth to slow to 1% while hiring (and hours worked) remain strong.

In a separate report, the ADP employment index showed an increase of 189,000 private-sector jobs in November, much stronger job growth than economists expected. See full story.

The third-quarter revisions were in line with the expectations of economists surveyed by MarketWatch. See Economic Calendar.

Productivity is measured by output divided by the number of hours worked. Output rose 5.7% in the third quarter, while hours worked fell by 0.6%.

Because they are volatile and backward looking, the third-quarter productivity figures are likely to have little impact on deliberations at the Fed, where policymakers are expected to cut interest rates again next week after slashing their overnight rate by three-quarters of a percentage point in the past three months.

High productivity growth means the economy can grow rapidly without inflation, raising living standards and theoretically allowing workers to get big raises without hurting the boss's profits.

Most economists focus on the longer trend, rather than on the volatile quarterly numbers.

In the past year, nonfarm business productivity has increased 2.7%, the largest four-quarter gain since late 2004. Unit labor costs are up 3% in the past year.

Productivity is a concept that's simple in theory but elusive in practice. Productivity gains are the key to higher living standards, higher wages, increased profits and low inflation.

But a low rate of productivity growth can mean a sluggish economy and increased inflationary pressures.

Unfortunately for those who want easy answers, productivity is extremely difficult to measure in practice, particularly in finance and other services.

In the nonfinancial sector, productivity increased at a 4.2% annual rate in the third quarter while unit labor costs rose 0.2%. Unit profits fell 10.1%. In the past year, nonfinancial sector productivity has risen 2%, while unit labor costs are up 3.6%.

In the manufacturing sector, productivity increased 5% in the third quarter while unit labor costs fell 3.3%. In the past year, manufacturing productivity has increased 2.8% and unit labor costs are up 2.8%.

Productivity averaged about 2.7% annually from 1948 to 1970, then slowed to 1.6% from 1971 to 1995. Since then, productivity has grown about 2.5% annually. In 2006, productivity increased 1%.

Productivity has slowed in the past few years. One of the big debates in the economy is whether that slowing is structural or related to the business cycle. If it's structural, Americans will have to become accustomed to slower growth. If it's cyclical, then the long-term speed limit of the economy will stay near 3%.

Rex Nutting is Washington bureau chief of MarketWatch.