Another month of more output, and businesses using high prices to take profits over paying workers

As Summer winds down, it seems like the overall US economy is still holding up. For example, the Institute for Supply Management’s report from last week indicated that things kept rolling along on the services side in August.

Economic activity in the services sector continued to expand in August, say the nation’s purchasing and supply executives in the latest ISM® Services PMI® Report. The Services PMI® registered 55.4 percent, the 26th consecutive month in expansion territory.

The report was issued today by Steve Miller, CPSM, CSCP, Chair of the Institute for Supply Management® (ISM®) Services Business Survey Committee: “In August, the Services PMI® registered 55.4 percent, an increase of 1.3 percentage points compared to July’s figure of 54.1 percent. The Business Activity Index remained in expansion territory in August, increasing 2.6 percentage points to 61.7 percent from July’s reading of 59.1 percent. The New Orders Index registered 60.9 percent, 3.7 percentage points above July’s figure of 57.2 percent. The Employment Index contracted for a second straight month with a reading of 47.8 percent, a 0.4-percentage point increase from the 47.4 percent recorded in July.

But the biggest number in the ISM index came from an area that you do NOT want to see it in, if you want the Fed to avoid raising interest rates in 10 days.

“The Prices Index registered above 70 percent for the fifth time in six months; the reading of 72.6 percent in August is 2.3 percentage points above July’s figure of 70.3 percent. The index has exceeded 60 percent for 21 straight months, with its 12-month average increasing by 0.4 percentage point to 68.5 percent, the highest since April 2023."

Sure sounds like things are going in the wrong direction on the inflation front, if we have the highest 12-month number in 3 1/2 years. And the rising costs were reiterated in this list later in the report.

And given that gas prices are now at a 3 month high, I can’t see the prices of those commodities or other ones that rely on transportation to be going down anytime soon.

But what’s with the disconnect of services employment declining while business activity grows stronger? Another report from Thursday seems to fill in those gaps.

Nonfarm business sector labor productivity increased 1.4 percent in the second quarter of 2026, the U.S. Bureau of Labor Statistics reported today, as output increased 1.7 percent and hours worked increased 0.3 percent. (All quarterly percent changes in this release are seasonally adjusted annualized rates.) From the same quarter a year ago, nonfarm business sector labor productivity increased 2.2 percent in the second quarter of 2026.

Unit labor costs in the nonfarm business sector increased 1.2 percent in the second quarter of 2026, reflecting a 2.6-percent increase in hourly compensation and a 1.4-percent increase in productivity. Unit labor costs increased 1.4 percent over the last four quarters.

BLS calculates unit labor costs as the ratio of hourly compensation to labor productivity. Increases in hourly compensation tend to increase unit labor costs and increases in productivity tend to reduce them. Real hourly compensation, which takes into account consumer prices, decreased 3.3 percent in the second quarter of 2026 and decreased 0.1 percent over the last four quarters. The labor share, which is the percentage of output that accrues to workers in the form of compensation, was 52.8 percent in the second quarter of 2026, the lowest level in the series, which begins in the first quarter of 1947.

Happy Labor Day, everybody! Workers are getting less back than they have in at least 80 years!

That makes for 5 straight quarters of year-over-year unit labor costs of 2% or less, well below the year-over-year rate of inflation in those quarters. And much less than the increases that workers were getting per unit 4 years ago, which at least offset some of the higher inflation of the time.

It also means that companies can either absorb some of the cost increases that they are dealing with, or (more likely) grab larger profits from the higher prices that are being charged while not trickling down any of those higher revenues to the workers that helped make it possible. Notice how the amount of hours worked has barely moved while productivity and output keeps going up in recent years.

Seems like something to keep filed away as we get a 3-day weekend to celebrate American laborers. And let's pay attention to how profits jump after the corporate tax rate has been kept low and given more writeoffs for 2025 and 2026 in Tax Scam 2.0. Just saying.