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Labor Productivity Calls Attention to Robust Economy, Despite Trade War

Despite the worries over ongoing trade disputes, the U.S. has been continuing to show signs of a robust economy. The productivity of non-farming American businesses increased at an annualized and seasonally adjusted rate of 2.9% in the second quarter, marking the biggest gain in more than three years.

Productivity is calculated by the difference between output (amount of goods and services produced) and the amount of time employees worked. The latter surged 4.8% and the former added 1.9%.

The increase in productivity is a good sign. It helps the companies keep labor costs under their control, even with the current state of the labor market—the tightest it has been in decades, with a very low unemployment rate.

Some possible reasons behind the surge can be the robust economy and President Donald Trump’s recent corporate tax cut.

This past July, the gross domestic product, or GDP, rose at an inflation-adjusted annual rate of 4.1% from April to June. This growth is at the strongest pace in four years. Also, the recent corporate tax cut has spurred businesses’ investments, which is also a contributor to GDP growth. This ideally and usually leads to increased productivity, an increase in consumer confidence, and a stronger economy.

But, it might be a bit too soon to conclude that the tax overhaul is the main driving factor. This quarter’s productivity has also been driven by nonmanufacturing businesses. It is highly possible that these firms have ramped up their machines and technologies to increase output while decreasing the amount of time their employees work.

Also, productivity from manufacturers fell 0.2% this quarter, which may be a sign that newly hired employees are undertrained or are lacking in skills.

Additionally, unit-labor costs, or the cost to make each product, fell by 0.9%, but over the course of past 12 months, rose 1.9%. This is a sign of wage inflation and is in line with the recent surge in CPI of 2.9% this quarter. If this continues, it may result firms raising their prices to keep up with the profit margins.

Just like the increase in the CPI and GDP growth this past couple months, this increase in productivity is a sign of a robust and growing economy. Such an outlook will most likely keep the Fed’s plan on raising short-term interest rates twice until December to prevent the economy from overheating steady.

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