The initial data for Q2 shows that US unit labor costs rose by 1.6%, slightly more than the expected 1.5%. Nonfarm business productivity went up by 2.4%, exceeding the 2.0% estimate, with a prior revision changing from -1.5% to -1.8%. According to the Bureau of Labor Statistics, the growth in nonfarm productivity resulted from a 3.7% increase in output and a 1.3% rise in hours worked. Compared to last year, productivity grew by 1.3%, and real hourly compensation rose by 2.3% in Q2 and 1.4% annually.

Rising Productivity Trends

Since Q4 2019, nonfarm productivity has averaged a 1.8% annual increase, which is better than the 1.5% rate from 2007 to 2019. In Q2, manufacturing productivity went up by 2.1%, with durable goods increasing by 3.3% and nondurable goods by 1.2%. In manufacturing, unit labor costs rose by 1.7%, with nondurable goods seeing a 3.8% increase and durable goods dropping by 0.2%. Year-over-year, manufacturing productivity improved by 1.5%, the best performance since Q2 2021, with an annual growth rate of 0.5%, surpassing the 0.1% pace from 2007-2019. This situation shows that higher worker pay is being offset by strong productivity gains, providing some relief for the Federal Reserve. This makes a significant rate hike at the September meeting less likely. For equity traders, this is a positive signal for taking on risk, especially in technology and industrial sectors. It reminds us of the late 1990s when a similar productivity boost led to a huge rally in tech stocks. Look for continued strength in options on the QQQ and SPX through August and September.

Opportunities in Durable Goods

The strength in durable goods manufacturing stands out, as unit labor costs there have actually decreased. With July’s industrial production showing a solid 0.5% increase, options on industrial ETFs like XLI seem appealing. This indicates that the move to bring manufacturing back to the US through automation is effective. Given that the July CPI report showed inflation cooling to 3.1%, this productivity report adds to a more relaxed outlook. Traders should consider strategies that benefit from stable or lower short-term interest rates, like buying SOFR futures or 2-year Treasury note futures. This ‘goldilocks’ scenario of strong growth without excessive inflation usually leads to less market volatility. With the VIX already around a calm 14, selling call spreads on the VIX could be a clever approach. We expect this data to reduce large market fluctuations in the near term. Create your live VT Markets account and start trading now.

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