Productivity Exceeds Expectations While Unemployment May Have Reached Bottom

Skyrocketing productivity rates for US businesses, combined with the lowest initial unemployment claims in nearly a year, have helped boost economic optimism. Analysts debate whether there will be …

Skyrocketing productivity rates for US businesses, combined with the lowest initial unemployment claims in nearly a year, have helped boost economic optimism. Analysts debate whether there will be further layoffs as companies try to produce more with fewer workers, or whether businesses have already cut payrolls to the bare minimum. For more on this, see the following article from Money Morning.

Productivity at U.S. businesses blew away forecasts in the third quarter and initial unemployment claims dropped to a 10-month low last week the Labor Department said Thursday.  The reports raised hopes that the labor market may be starting to bottom.

The news sent the stock markets soaring as the Dow Jones Industrial Average rose 204.05 points, or 2.08%%, to close at 10,006.19, while the Standard & Poor’s 500 Index popped 20.13 points, or 1.92%, to close at 1,066.63 and the Nasdaq Composite Index gained 49.8 points, or 2.42%, to close at 2,105.32.

Business productivity rose a higher-than-expected 9.5%, its fastest pace in six years, as companies squeezed more output from fewer workers. A survey of analysts by Reuters had projected productivity, or output per hour per worker, to rise at a 6.4% rate in the third quarter.

Productivity data “has indicated resilience and growth, though it also has a negative connotation of more being done with fewer workers,” Peter Kenny, managing director, Knight Equity Markets in Jersey City, New Jersey told Reuters. “Expect unemployment to creep up as productivity does.”

But other analysts think businesses have cut to the bone already and, combined with an economy showing new evidence of growth in the third quarter, companies will now be forced to hire workers to replenish inventories.

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“The combination of very a powerful productivity gain and low labor costs … keeps inflation at bay. This reinforces the Fed’s ability to stay on the sidelines for an ‘extended’ period.’” Richard DeKaser, president, Woodley Park Research in Washington told Reuters.

The central bank on Wednesday expressed optimism an economic recovery was underway and policymakers voted to keep the target federal-funds rate for inter-bank lending at a record-low range of zero to 0.25%.

Initial claims for jobless benefits decreased by 20,000 to 512,000 in the week ended Oct. 31, the lowest level since early January, the Labor Department reported. The previous week’s level was revised to 532,000.

Economists surveyed by Dow Jones Newswires had projected a drop of only 5,000 claims.

More significantly, the four-week moving average for new claims fell 3,000 to 523,750 last week, declining for the ninth week in a row, indicating the labor market may be stabilizing. The four-week moving average is seen by economists as a more accurate gauge because it evens out week-to-week volatility in the data.

“Over the past two weeks, initial jobless claims were somewhat disappointing,” Barclays Capital economist Michelle Meyer told The Wall Street Journal. “But the four-week moving average has actually still improved.”

However, October unemployment figures today (Friday) are expected to show that the U.S. unemployment rate soared above 10% in October, even as the pace of layoffs slowed. The national unemployment rate hit 9.8% in September.

Analysts have forecast that payrolls fell 175,000 in October, compared with a decline of 263,000 in September.

After the worst recession in 70 years, fixing the labor market is critical to a sustained economic recovery.  Wide-spread unemployment is putting a chill on consumer spending, responsible for 70% of all economic activity.

The economy grew in the third quarter for the first time in more than a year, mostly on the back of government stimulus programs. But keeping economic growth on track will eventually mean weaning the economy off government stimulus.

“We need households to become a little more confident and businesses to start thinking about tomorrow so we can transition out of the government and Fed supported economy into a private sector recovery,” said Joel Narnoff, President of Holland, Pennsylvania- based Naroff Economic Advisors, in a note to investors.

This article has been republished from Money Morning. You can also view this article at
Money Morning, an investment news and analysis site.

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