The productivity of U.S. workers advanced in the third quarter more slowly than previously estimated, a signal that efficiency gains are contributing less to growing corporate profits.
The measure of employee output per hour increased at a 2.3 percent annual rate after declining for two quarters, revised data from the Labor Department showed today in Washington. The previous figures indicated productivity rose 3.1 percent in the July-September period. Expenses per employee fell at a 2.5 percent rate, more than initially estimated.
Companies may find it harder to maintain earnings growth with productivity cooling relative to the recovery, when employment fell faster than output. Meanwhile, slower efficiency gains mean short term increases in demand could lead to larger payrolls at the same businesses.
“Going forward, productivity depends on how much longer corporate America can make more with less labor input,” Ellen Zentner, senior U.S. economist at Nomura Securities in New York, said before the report. “At some point, the cost of additional capital is going to outweigh the cost of additional labor, and businesses will have to accelerate hiring.”
Third-quarter productivity was projected to pick up by 2.5 percent, according to the median forecast of 55 economists surveyed by Bloomberg News. Estimates ranged from gains of 1.4 percent to a high of 3.2 percent.
Compared with the July-September period in 2010, worker output per hour increased 0.9 percent. It fell in the first two quarters of this year, marking the first back-to-back declines since the second half of 2008.
Among manufacturers, business efficiency increased at a 5.0 percent rate in the third quarter.
Unit labor costs, which are adjusted for productivity gains, were revised from a 2.4 percent drop first estimated. They were forecast to slide 2.1 percent in the survey median.
The measure of expenses per employee increased 0.4 percent from the year-earlier period.
Hourly compensation adjusted for inflation declined 2.3 percent year over year, which was the largest drop since the data series began in 1948, the Labor Department said.
Improvements in output per hour have helped U.S. companies manage rising input costs and any upticks in demand without losing earnings or rapidly expanding payrolls.
“We continued to grow sales productivity, the key driver of profitability,” Michael MacDonald, president and chief executive officer of DSW Inc. (DSW), said during a Nov. 22 call with analysts. Adjusted profit rose to $39.8 million in the third quarter from $35.5 million a year earlier, according to the Columbus, Ohio-based shoe retailer. Efficiency at DSW has increased 22 percent since 2008, MacDonald said.
Even so, overall efficiency gains in the U.S. have slowed compared with 2009 and 2010, when productivity advanced 2.3 percent and 4.1 percent. That means additional expenses will increasingly eat into businesses’ profits.
“Corporate cost structures are extremely lean, and it’s going to be tough to cut anything any further,” said Aneta Markowska, a senior U.S. economist at Societe Generale in New York. “Profits will slow down sharply. The idea of 40 percent year-on-year profit growth, we won’t see that for a while.”
Earnings at U.S. companies climbed 2.1 percent last quarter to $1.98 trillion at an annual rate, down from 3.3 percent in the prior three months, according to Commerce Department data.
To maintain profitability, businesses may have to take a greater share of income away from employees. At $8.25 trillion, worker compensation, including wages and supplements, in the third quarter accounted for a 56-year low of 55 percent of the nation’s gross domestic income, a measure of the money earned by the people, businesses and government agencies whose purchases go into calculating economic growth.
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