Worker productivity rose at the fastest pace in two years in the U.S. in the third quarter while labor costs fell, the Labor Department said yesterday. For the dismal science, the trend suggests that inflationary pressures will stay contained.

The report is “great news on the inflation front,” David Greenlaw, chief U.S. fixed-income economist at Morgan Stanley in New York, told Bloomberg News. “It will be very difficult for the economy to generate any sustained rise in core inflation, with unit labor costs showing such a high degree of restraint.”
But the gold bugs, an ornery lot in the best of times, aren’t necessarily inclined to listen. The price of the precious metal continued pushing higher in early trading on Wednesday, reaching over $513 an ounce at one point–a 24-year high–before pulling back. Inflation worries run amuck? Perhaps, although gold doesn’t exist in a vacuum. Commodities generally are rising in price, gold being just one of them, and unspectacularly, as it turns out compared to, say, copper, which has climbed more than 40% this year vs. gold’s 20% rise, as of yesterday.
Commodities overall, measured by the CRB Index, show a 14% year-to-date gain. Gold, which is part of the CRB and other commodity indices, may be rising as much as for traditional reasons (inflation hedging and jewelry buying) as it is for increased purchases of commodities in an expanding global economy.
Already, some are calling the run in gold prices above $500 an ounce a bubble, and one that’s poised to burst. “When this sentiment-driven rally finally comes to an end, the pull-back we are going to see is going to be aggressive,” Simon Weeks, director of precious metals at ScotiaMocatta, told Reuters today. “We are probably going to have a $25-$30 move on the downside when this sort of sentiment-bubble finally bursts.”
Indeed, without throwing the gold market another inflationary bone to chew on it’s hard to see the metal moving substantially higher from here without at least a correction. Of course, gold bugs can and do argue that inflation statistics are manipulated and so minimize the true rate of inflation, which they say is rising. Still, fresh confirmation is needed for the metal to see $600 any time soon.
What’s more, with the stock market continuing its buoyant ride of late, the competition for assets remains intense, and that could put doomsday investing on the defensive in the coming days and weeks. Gold may be the ultimate store of value, but when equities are rising in a year-end rally even a dedicated gloomster can get distracted. Indeed, the S&P 500 climbed to a four-year high yesterday, and the rosy government labor report for the third quarter was no trivial factor. Higher productivity may not boost hiring, but it does wonders for corporate earnings.
Ed Yardeni, chief investment strategist for Oak Associates, posed the topical question of the moment and then resolved it in an email note to clients: “Is productivity great or what? The answer is: It’s great.” He then pointed out, “The trend growth rate has been roughly 3% a year for the past 10 years. During Q3, nonfarm productivity jumped 4.7% (seasonally adjusted annual rate), and was up 3.1% year over year. For nonfinancial corporations (NFC) the quarterly increase was less at 3.2%, but the year over year was more at 4.7%. NFC unit labor costs have been virtually flat for the past three years. No wonder inflation has remained so subdued and profits have been so strong.”
With virtually all of the S&P 500 companies’ third-quarter reports in, Zacks reports that the news is generally one of better-than-expected earnings results. For the third quarter, Zacks said that the median S&P 500 firm reported an earnings gain of 13.8% on a year-over-year basis. Energy led the way in terms of growth (+77%), but the earnings train was in force in various sectors. In fact, of the ten S&P 500 sectors, only materials posted a loss (-2.4%) for the third quarter in terms of an earnings comparison with a year ago.
More of the same is on tap for 2006, Zacks predicts, opining that a 12.2% earnings climb will come next year, or only slightly below the 13.9% pace it expects for 2005.
None of that will comfort gold bugs. But for the moment, there’s enough room for profits across the sentiment spectrum. Performance in stocks and commodities has been robust this year. Can the twin engines of light and dark last into 2006?