U.S. Productivity Leaps

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U.S. productivity staged its biggest gain in nearly six years in the second quarter despite the contraction in the overall economy, suggesting companies have adjusted to the recession by cutting jobs and workers’ hours. … The data help explain why companies have been able to post good earnings figures, having moved quickly to slash jobs and cut costs.

“In short, good macro news, but it reflects painful job losses,” Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., said in a note to clients.

Over the long run, productivity is key to improved living standards by spurring rising output, employment, incomes and asset values. While the jump in productivity could suggest that the economy is poised for a strong recovery once it reaches bottom, that could be offset by the negative impact on consumer demand from job losses.

Labor market conditions are expected to remain difficult, though the 247,000 drop in nonfarm payrolls in July was the smallest decline since August 2008. The economy has also shown signs of stabilization, with gross domestic product registering a 1% contraction in the second quarter. …

Joshua Shapiro, chief U.S. economist at MFR Inc., said that despite signs of improvement in the economy, the job market will likely remain tight. “Looking ahead, stabilizing output ought to prompt a less aggressive approach to cost-cutting on the labor front, hence a commensurately slower rate of decline in hours worked,” he said in a note. “However, we do expect efforts to boost productivity to continue, and therefore any labor market recovery to be late in arriving and tepid when it does begin.”

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