Insights 
VT 
The preliminary data for Q2 shows US unit labour costs rose by 1.6%, slightly higher than the 1.5% estimate. Nonfarm business productivity increased by 2.4%, surpassing the 2.0% estimate, with a previous revision to -1.8% from -1.5%.
According to the Bureau of Labor Statistics, nonfarm productivity grew due to a 3.7% output increase and a 1.3% rise in hours worked. Year-over-year, productivity climbed by 1.3%, with real hourly compensation rising 2.3% in Q2 and 1.4% annually.
Rising Productivity Trends
Since Q4 2019, nonfarm productivity has shown a 1.8% annualised rise, exceeding the previous 1.5% rate from 2007 to 2019. Manufacturing productivity rose by 2.1% in Q2, with durable goods up by 3.3% and nondurable goods by 1.2%.
Unit labour costs in manufacturing increased by 1.7%, with nondurable goods seeing a 3.8% rise and a 0.2% drop in durable goods. Year-over-year, manufacturing productivity has improved by 1.5%, the strongest since Q2 2021, with an annualised growth rate of 0.5% in the current cycle, above the 0.1% pace from 2007–2019.
We are seeing a story where higher worker pay is being balanced by strong productivity gains. This should give the Federal Reserve some breathing room in the coming months. It makes an aggressive rate hike at the September meeting less likely.
For equity traders, this is a green light for risk-on positioning, especially in technology and industrial sectors. This reminds us of the late 1990s, when a similar surge in productivity fueled a massive 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 is particularly noteworthy, with unit labor costs there actually falling. With the July industrial production figures showing a solid 0.5% increase, we believe options on industrial ETFs like XLI are attractive. This suggests the push to bring manufacturing back to the US through automation is working.
Given that the July CPI report from earlier this week showed inflation cooling to 3.1%, this productivity report reinforces a dovish tilt. Traders should consider positions that bet on stable to lower short-term interest rates. This could involve buying SOFR futures or 2-year Treasury note futures.
This ‘goldilocks’ scenario of strong growth without runaway inflation is typically negative for market volatility. With the VIX already sitting near a relatively calm 14, selling call spreads on the VIX could be a prudent way to play this. We expect this data to suppress large market swings in the near term.
