Led by a 4.9 percent jump in manufacturing productivity, American businesses improved their efficiency in producing goods and services at an annual rate of 1.3 percent in the second quarter, the Labor Department said yesterday.
The overall productivity improvement rate for nonfarm businesses was slightly below the 1.4 percent increase reported in preliminary figures last month by the Labor Department, but it still was more than triple the gains of the first quarter.
The labor costs associated with producing each unit of goods or services rose at an annual rate of only 1.7 percent in the second quarter compared with an inflation rate of 5 percent so far this year as employers kept nominal wage increases to 3 percent.
"The performance on unit labor costs has been outstanding, and is a big reason for the tremendous profits that American companies are showing this year," said Allen Sinai, chief economst for Shearson Lehman Bros. Inc., a Wall Street investment house.
After accounting for inflation, workers saw the purchasing power for each hour of their labor drop 1.8 percent in the second quarter.
Last year hourly wages rose an average 3.9 percent, keeping workers well ahead of consumer price increases of only 1.1 percent.
Meanwhile, the Commerce Department reported yesterday that sales of new homes edged up a modest 0.5 percent in July, compared with an annualized increase of 1.1 percent the previous month and a drop of more than 12 percent in May.
Prices of new homes dropped to a median $107,000, a 0.9 percent decrease from June but still 13.7 percent above the median price in July 1986.
The Labor Department's revised productivity figures showed that the output of goods and services and the hours worked to produce them both were slightly below the original estimates for April through June.
However, productivity improvement in the manufacturing sector -- which accounts for about one-fourth of the nation's economic activity -- was much better than the 3.3 percent originally reported.
According to the revised figures, factory output rose at an annual rate of 3.4 percent, double the size of the estimated increase in the preliminary report, despite a 1.5 percent decline in the number of hours worked.
The 4.9 percent productivity gain in manufacturing was more than enough to offset hourly wage increases averaging just 2 percent, reducing the labor costs for each item coming off the assembly line an average 2.9 percent.
"Efficiency improvements in manufacturing have been so large in recent years that any increase in output is going to send productivity jumping forward sharply," said Jerry Jasinowski, chief economist for the National Association of Manufacturers.
Sinai said increased sales, particularly exports, both contribute to and result from the productivity increases in manufacturing.
"So long as productivity growth outstrips wages, unit labor costs are going to continue to decline," Sinai said. "That's not only a healthy sign for manufacturing, it is very positive for the inflation picture and an even better sign for corporate profits."
Wage increases and labor costs in manufacturing are not likely to accelerate until 1988, Sinai said. And Jasinowski predicted they will remain fairly stable over the next several years.
"Labor is continuing to become a smaller portion of the production process and that has to reduce their leverage," Jasinowski said.
The Labor Department does not keep separate productivity figures on the rapidly expanding services sector of the economy, which has been responsible for 90 percent of the job growth over the past decade.
But without the manufacturing component, the productivity figures for all nonfarm businesses would likely have shown a decline rather than a 1.3 percent increase, according to Sinai.
"Frankly, I doubt it is as weak as the data suggest," he said. "Nonetheless, productivity growth remains very anemic on the services side of the economy."
Michael Evans, who runs a private economic forecasting firm in Washington, said huge restructuring of manufacturing enterprises in the past three years is not accounted for in the government figures.
As a result, he said, productivity gains in manufacturing are overstated while they are understated in services.
"More and more companies are outsourcing jobs," he said. "Someone who once was in public relations, washing the windows or mowing the grass on a manufacturer's payroll is doing the same work now, but as a consultant or an outside contractor and at a smaller cost in wages, salaries and benefits."
The practice, Evans said, reduces direct labor cost figures as collected by the government with a corresponding or slightly smaller increase in nonlabor overhead expenses.