Productivity Growth Returns

The biggest economic change in 2017, in my opinion, is the improvement in productivity. Growth in productivity is the key to economic expansion. Without productivity growth, we just have nominal growth driven by inflation. Productivity grew 3% on an annualized rate in Q3 which is the fastest growth rate since Q3 2014. In Q2 2017, productivity only grew 1.5%. The Q3 report beat expectations for 2.4% growth. On a year over year basis, productivity was up 1.5%. Manufacturing productivity fell 5% quarter over quarter which was the worst reading since Q1 2009. It might have been impacted by the weather. From 2007 to 2016 productivity grew 1.2% which was below the 2.1% growth average from 1947 to 2016. Hopefully, this is a new step in the right direction. Output increased 2.8% and unit labor cost was up 0.5%. The more productivity rises, the easier it will be for businesses to handle wage growth. The fact that productivity is accelerating shows that the labor market is tight.

Manufacturing ISM Report

The ISM report has been one of the most optimistic economic reports that we’ve reviewed this year. The manufacturing report took a step back on Wednesday as it fell to 58.7 from 60.8. That’s still not a bad report as it’s 0.7 point above the 2017 average and 1.9 points above the 12 month average. It’s consistent with 4.9% GDP growth which is clearly not going to be reached. The 2017 average is consistent with 4.4% growth which also won’t be reached. That’s why I say it’s one of the most optimistic reports. Every single measure besides costumers’ inventories and imports fell from last month. New orders fell 1.2 points to 63.4. The overall manufacturing economy is still growing, but it slowed. I think the best summary of this report is to say last month was over the top and this month is back to normal. The September numbers were juiced by the hurricanes. The fact that this month fell from a juiced number is to be expected.