2Q Productivity Jumps, Unit Labor Costs Fall, Jobless Claims Rise, Service Sector Expanding Slightly, Prices Paid Declines

- ADP Employment Change for August was -33K versus estimates of -30K and +1K in July.

- Final 2Q Non-farm Productivity rose 4.3% versus estimates of a 3.5% increase and a 2.2% gain in 1Q.

- Final 2Q Unit Labor Costs fell .5% versus estimates of unch. and a 1.3% rise in 1Q.

- Initial Jobless Claims for last were 444K versus estimates of 420K and 429K the prior week.

- Continuing Claims were 3435K versus estimates of 3420K and 3429K prior.

- ISM Non-Manufacturing for August rose to 50.6 versus estimates of 49.5 and a reading of 49.5 in July.

BOTTOM LINE: US worker productivity in the second quarter increased more than previously estimated and labor costs unexpectedly declined, Bloomberg reported. 2Q productivity rose at a 4.3% annual rate, the highest since 3Q 2007 and more than double the long-term average of 1.9%. Productivity at non-financial corporations, a gauge closely monitored by the Fed, soared at a 5.6% rate in 2Q. 2Q Unit Labor Costs, the main component of inflation, fell at a -.5% annual rate, the lowest since 3Q 2007 and well below the long-term average of +3.0% increases. I still expect Unit Labor Costs to remain subdued over the intermediate-term and Productivity to remain above average rates.

First-time claims for unemployment insurance rose more than forecast, Bloomberg reported. However, the four-week moving average of initial claims fell to 438,000 from 441,250 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held steady at 2.6% versus the long-term average unemployment rate of 2.9%. 23 states and territories reported a decline in jobless claims. The ADP Employment Change for August was -33K versus estimates of -30K and +1K in July. Companies with more than 499 workers cut their workforces by 28,000. Medium-sized businesses, with 50-499 employees, eliminated 25,000 jobs, while small businesses actually added 20,000 new employees. I expect the Change in Non-farm Payrolls for August, released tomorrow, to modestly exceed estimates of -75K.

US services industries, which make up almost 90% of the US economy, grew in August as a measure of prices fell by the most in almost two years, Bloomberg reported. The Prices Paid component fell to 72.9, the second straight decline, from 80.8 a month earlier. The New Orders component rose to 49.7 versus 47.9 in July. Supplier Deliveries rose to 55.5 from 53.5 a month earlier. The Inventory component fell to 53.5 from 54.5 in July. The Employment component of the index fell to 45.4 versus 47.1 in July. I suspect the ISM Non-Manufacturing Index will improve again next month on lower energy/food prices, better consumer sentiment, decelerating inflation and low interest rates. The Citi eurozone economic surprise index is falling to -164.2 and the US economic surprise index is rising to +73.60 today. The US Dollar Index is surging another .59% and the 10-year yield is falling another 3 basis points to 3.66% on today’s news. The BankRate.com average 30-year fixed mortgage rate is falling another 6 basis points to 6.19%, which is down 33 basis points in a little over five weeks, which is a big positive.