U.S. Productivity Rises as Labor Costs Ease
U.S. businesses produced more with nearly the same hours worked in the third quarter. The Bureau of Labor Statistics said Thursday that nonfarm business productivity rose at a 3.6% annualized pace while labor costs per unit of output fell at a 0.7% pace. Hourly compensation still rose. The difference was that output per hour grew faster, so businesses could pay more for an hour of work while spending less on labor for each unit they produced.
That combination gives some borrowers in the Fly High universe room to improve their margins. For a company that can sell the extra output without cutting prices, lower labor costs per unit leave more cash to cover interest. Business development companies, which lend to many midsize firms, benefit when borrowers can keep paying interest from operations. The effect will vary with each borrower’s sales and expenses, especially where interest or materials absorb the gains from labor. And the productivity report is preliminary. Unit labor costs were still 2.4% higher than a year earlier.
The Labor Department’s weekly report offered some encouragement on demand. New unemployment claims fell by 6,000 to 189,000 in the week ended October 31. Fewer new claims are consistent with fewer layoffs, which can help support household spending and the businesses that rely on it. Meanwhile, the number of people still receiving insured benefits rose by 23,000 to 1.718 million in the preceding week. That makes it harder to read the drop in new claims as evidence of a broad hiring rebound.
Financing still matters. The Treasury’s 10-year yield fell from 4.95% Tuesday to 4.90% Wednesday while the three-month yield held at 4.21%. A lower long-term benchmark can help a borrower refinancing fixed-rate debt if the extra yield demanded by lenders holds steady. Companies paying floating rates may see little immediate relief when short rates barely move. Their operating cash flow still has to carry the interest bill.
Our read is that the productivity figures give lenders a better reason to look for steadier interest income from existing loans. We’d give that signal more weight when borrowers report enough cash from operations to pay interest without drawing down reserves or borrowing more. That is where a better operating backdrop can turn into earnings that support lender dividends.
Sources
- Bureau of Labor Statistics, third-quarter productivity and costs
- U.S. Department of Labor, November 5 unemployment claims
- U.S. Treasury, November daily yield curve rates
This article is general information, not personalized investment advice. Fly High Investing may hold securities discussed in this article.