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U.S. Labor Productivity Unexpectedly Dips 0.3% In Q3

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Labor productivity in the U.S. unexpectedly edged lower in the third quarter, according to preliminary data released by the Labor Department on Wednesday.

The report said labor productivity dipped by 0.3 percent in the third quarter after spiking by an upwardly revised 2.5 percent in the second quarter.

The drop in productivity came as a surprise to economists, who had expected productivity to climb by 0.9 percent compared to the 2.3 percent jump originally reported for the previous month.

The unexpected decrease in productivity, a measure of output per hour, came as output climbed by 2.1 percent compared to a 2.4 percent increase in hours worked.

Meanwhile, the Labor Department said unit labor costs soared by 3.6 percent in the third quarter after surging up by a downwardly revised 2.4 percent in the second quarter.

Economists had expected unit labor costs to increase by 2.2 percent compared to the 2.6 percent spike originally reported for the previous month.

The substantial increase in labor costs reflected the drop in productivity as well as a 3.3 percent jump in hourly compensation.

Real hourly compensation, which takes changes in consumer prices into account, showed a much more modest 1.4 percent increase in the third quarter.

Compared to the same quarter a year ago, productivity in the third quarter was up by 1.4 percent, as output increased by 2.3 percent and hours worked rose by 0.9 percent.

Unit labor costs were up by 3.3 percent year-over-year, with hourly compensation spiking by 4.5 percent and real hourly compensation climbing by 2.7 percent.

Andrew Hunter, Senior U.S. Economist at Capital Economics, noted the annual rate of productivity growth is still slightly above the previous five-year average but illustrates that the acceleration in growth that began last year is already fading.

"That isn't a huge surprise given the recent weakness of business investment, with declines in both the second and third quarters meaning that the earlier wave of capital deepening has now gone into reverse," Hunter said.

"Weak investment can in turn partly be blamed on trade uncertainty, in which case we could see a rebound if a deal with China is eventually agreed," he added. "But it also reflects the fact that weaker demand is contributing to the re-emergence of spare capacity, reducing the need for firms to invest."

Hunter said he remains relatively optimistic about the longer-run prospects for productivity growth due to emerging technologies like AI and driverless vehicles but noted there are currently still no sign of a breakout from the weak post-crisis trend in productivity growth.

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