Productivity Accelerates, Service Sector Expanding, ADP Employment Jumps

- Final 1Q Non-farm Productivity rose 2.6% versus estimates of a 2.5% gain and prior estimates of a 2.2% increase.

- Final 1Q Unit Labor Costs rose 2.2% versus estimates of a 2.0% gain and prior estimates of a 2.2% increase.

- ISM Non-Manufacturing for May came in at 51.7 versus estimates of 51.0 and a reading of 52.0 in April.

- ADP Employment Change for May was +40K versus estimates of -30K and an upwardly revised +13K in April.

BOTTOM LINE: US worker productivity in the first quarter accelerated more than previously estimated, Bloomberg reported. Labor costs climbed at a revised 2.2% pace, the same as estimated and down from a 4.7% gain in 4Q 07. Unit labor costs account for about two-thirds of the cost to produce a good or service. Productivity at non-financial corporations, a gauge closely watched by former Fed chairman Greenspan and other policy makers, surged at a 4.6% rate during 1Q, almost twice as much as during 4Q 07. I still expect unit labor costs to remain muted and productivity to remain healthy over the intermediate-term.

US service industries, which make up almost 90% of the US economy, continued to expand in May, Bloomberg reported. The New Orders component rose to 53.6, the highest this year, versus 50.1 in April. The Employment component fell to 48.7 from 50.8 the prior month. The Prices Paid component increased to 77.0 versus 72.2 the prior month. I expect the ISM Non-Manufacturing Index to accelerate further this month and to continue to modestly improve through year-end on decelerating inflation, rising consumer confidence, a firmer job market, fiscal/monetary stimuli, relatively low interest rates and rising stock prices.

Companies in the US unexpectedly added jobs in May by the most since January, Bloomberg reported. As well, the ADP report does not include government jobs. Services providers added 77,000 workers and construction jobs declined by 13,000. Financial Services companies added 5,000 jobs. Large companies cut payrolls by 18,000, while small companies added 61,000 jobs in May. I expect Friday’s jobs report to modestly exceed estimates of -60,000 and the job market to show further improvement through year-end.