Productivity Hurt by Weak Manufacturing

American workers made modest productivity gains in the third quarter, but the lackluster manufacturing sector posted its lowest output gain in three years and continued to slow the overall economy, the government said Wednesday.

And for the first time this year, the quarter-to-quarter hourly wage gains made by workers outpaced the growth in consumer inflation, the Labor Department said.

The department said overall productivity in the non-farm sector of the economy increased at a revised annual rate of 2.5% in the July-September period, more than double the anemic 1.1% annual rate gain in the second quarter.

But in manufacturing, a sector weakened by slumping auto sales and other problems, productivity increased at a revised annual rate of just 1% after improving at an annual rate of 3.7% in the April-June period.

The poor manufacturing performance came as output rose just 1.2% and hours worked increased a weak 0.2%, reflecting slackened demand for goods. The increase in output was the smallest since a slight decline in the second quarter of 1986.

Because of the poor productivity gain in manufacturing and a significant increase in wages, unit labor costs, a key determinant of future price inflation, rose at an annual rate of 4.9% after decreasing by 1% in the second quarter. It was the largest increase in unit labor costs since the 1982 recession, the department said.

That increase will likely translate into either higher prices for consumers for manufactured goods or lower profits for producers--or both--and also makes it more difficult for U.S. manufacturers to compete in overseas markets.

“We’re getting more upward wage pressure in manufacturing, and with the weak productivity numbers, that pushes up costs,” said Michael Evans, head of a Washington forecasting firm.

PRODUCTIVITY

Non-farm business productivity, percent change from previous quarter, seasonally adjusted annual rate. Third quarter 1989 Revised 2.5%.

Source: Labor Department