Productivity Healthy, Unit Labor Costs Decline, Jobless Claims Below Estimates, Service Sector Healthy, Prices Paid Declines

- Final 2Q Non-farm Productivity rose 2.6% versus estimates of a 2.4% gain and a prior estimate of a 1.8% increase.

- Final 2Q Unit Labor Costs rose 1.4% versus estimates of a 1.5% gain and a prior estimate of a 2.1% increase.

- Initial Jobless Claims fell to 318K versus estimates of 330K and 337K the prior week.

- Continuing Claims rose to 2598K versus estimates of 2575K and 2573K prior.

- ISM Non-Manufacturing for August rose to 55.8 versus estimates of 54.5 and a reading of 55.8 in July.

BOTTOM LINE: Worker productivity in the US accelerated more than forecast in the second quarter and labor costs cooled, lowering the risk of a pickup in inflation as the Fed weights cutting interest rates, Bloomberg said. Productivity rose at a 2.6% annual rate, the most in 2 years. Productivity at non-financial companies, a gauge closely monitored by the Fed, jumped 3.5% in 2Q versus a .7% gain in 1Q. This data gives the Fed more leeway to cut rates if necessary.

The total number of Americans receiving unemployment benefits rose to a six-month high even as new applications fell more than forecast last week, Bloomberg reported. The four-week moving average for initial jobless claims rose to 325,750, the highest since April. As well, the unemployment rate among those eligible for benefits, which tracks the US unemployment rate, rose to 2% from 1.9%. While the job market has slowed a bit, it is still healthy by historical standards. I continue to believe it will remain healthy over the intermediate-term without generating substantially unit labor cost increases.

Service Industries that make up 90% of the US economy grew more than forecast in August, confirming the Fed’s view that the impact of the credit-market rout is “limited” outside of housing. The new orders component rose to 57 from 52.8, the biggest increase in 11 months. However, the employment component fell to 47.9 from 51.7 in July. The prices paid component fell to 58.6, the lowest since February, versus 61.3 in July. This report and better-than-expected retail sales in August illustrate the economy’s resilience. I still see little evidence of a substantial imminent economic slowdown even as investors continue to price this into stocks at current levels.