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Companies paid more for less in Q3: Morning Brief

Myles Udland
Markets Reporter

Thursday, November 7, 2019

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Productivity dropped, labor costs surged

Corporate America paid more for workers to give them less output in the third quarter. And the trade war could be to blame.

On Wednesday, the BLS released its latest data on worker productivity and unit labor costs, which showed productivity declined 0.3% last quarter while unit labor costs rose 3.6% over last year. Of the surge in labor costs, 3.3% was attributed to higher compensation. The remainder was due to the decline in productivity.

This was the first decline in productivity since the end of 2015.

The decline in productivity "isn't a huge surprise," according to Andrew Hunter, senior U.S. economist at Capital Economics, "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."

"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," Hunter added.

And while structurally lower worker productivity is part of the “secular stagnation” thesis that grew in popularity during the mid-2010s, worker output is ultimately a function of how much businesses invest in their workforce.

Maybe it's time to invest in new equipment.

Corporate investment trends over the last few years have led to a relatively strong period of productivity gains. In last week's third quarter GDP report, nonresidential private investment declined at an annualized pace of 3%, its second-straight quarter of declines.

The trouble for Corporate America, however, doesn’t end with lower output as the rising cost of labor also poses risk to profit margins. Wednesday’s data on unit labor costs brought the annual trend in costs to 3.1%, the fastest in five years.

“This is bad news for companies’ profit margins which have come under increased pressure due to rising input costs and lower revenue growth,” said economists at Oxford Economics on Wednesday.

The firm added that, “slower domestic and foreign economic momentum and limited companies’ pricing power, tighter profit margins will continue to remain a key headwind for business activity as we head into 2020.”

But as Renaissance Macro’s Neil Dutta said earlier this week, “the macro debate right now is pretty simple. You either think ‘price leads data’ or not.”

Recent rounds of economic data from the third quarter are clearly confirming what markets told us at the time — that during the late summer months the U.S. economy took a step back. In recent weeks, however, financial markets have given investors the “all clear” when it comes to the economic outlook in 2020.

In other words, the market has already discounted this productivity number and said the worst is probably over for the U.S. economy.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him @MylesUdland

What to watch today

Economy

  • 8:30 a.m. ET: Initial Jobless Claims, week ended November 2 (215,000 expected, 218,000 prior); Continuing Claims, week ended October 26 (1.690 million prior)

  • 9:45 a.m. ET: Bloomberg Consumer Comfort, week ended November 3 (61.0 prior)

Earnings

Pre-market

  • 8 a.m. ET: Ralph Lauren (RL) is expected to report $2.39 per share on $1.7 billion in revenue

Post-market

  • 4 p.m. ET: Booking Holdings (BKNG) is expected to report earnings of $44.87 per share on $5.08 billion in revenue

  • 4:05 p.m. ET: Activision Blizzard (ATVI) is expected to report earnings of 23 cents per share on $1.17 billion in revenue

  • 4:05 p.m. ET: Disney (DIS) is expected to report adjusted earnings of 96 cents per share on $19.03 billion in revenue

  • Other notable reports: Zillow Group (ZG), Lions Gate (LGF-A), Take-Two Interactive (TTWO)

Read more

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