There was a sharp increase in productivity in the second quarter of 2020. Nonfarm business sector labor productivity increased by 7.3%. However, this number masks some underlying economic weaknesses. Productivity is calculated by dividing output by the number of hours worked. In the second quarter of 2020, output decreased by 38.9% and hours worked decreased by 43%. This leads to the assumption that people worked harder under constraints in the quarter. We have not seen such a large increase in productivity since the second quarter of 2009. The expectation was for growth of 1%.

Unit labor costs, the ratio of hourly compensation to labor productivity, increased by 12.2% in the second quarter. This is another indication of how efficiently the country is producing. The growth is the fastest seen since 2014.

July retail sales growth was slower than expected. The 1.2% growth in the month comes in lower than the projected 2%. Declines in the sales of autos and building materials and garden equipment contributed to the lower than expected number. Excluding autos, retail sales grew by 1.9%. Retail sales had grown by 8.4% in the previous month.

Manufacturing and trade inventories decreased in June by 1.1%. The decrease was led by reductions in retail and merchant wholesalers’ inventory. The decrease was better than what was estimated. Initial projections had inventories down 1.2%. The inventory to sales ratio for the period was 1.37, while the previous month’s inventory to sales ratio was 1.39. This ratio shows how much inventory is being stocked relative to how much is being sold.

We are almost all the way through second quarter earnings season, and 94% of S&P 500 companies have reported. The reports have been better than expected. Then again, the bar was set very low. If this quarter’s growth expectation was a pole-vaulting event, the bar was basically on the ground. The decline in earnings of 30.7% is 21.8% better than expected. Sales declined by 9%, which was 2.5% better than initial estimates. Technology, healthcare and the utilities sectors recorded positive earnings growth in the quarter. Technology, healthcare and financials led in revenue growth.

Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
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