US: Productivity and Costs


Thu Mar 05 07:30:00 CST 2015

Consensus Consensus Range Actual Previous Revised
Nonfarm productivity - Q/Q change - SAAR -2.3% -2.7% to -2.0% -2.2% -1.8% 3.9%
Unit labor costs - Q/Q change - SAAR 3.1% 2.3% to 3.9% 4.1% 2.7% -1.0%

Highlights
Nonfarm productivity growth for the fourth quarter declined an annualized 2.2 percent (originally down 1.8 percent), following a 3.9 percent jump in the third quarter. Forecasts were for a 2.3 percent drop. Unit labor costs increased 4.1 percent (originally up 2.7 percent) after falling an annualized 1.0 percent in the third quarter. Expectations were for a 3.1 percent boost.

Today's report includes annual revisions.

Output growth decelerated to 2.6 percent in the fourth quarter, following a 6.3 percent jump the prior quarter. Compensation growth came in at 1.9 percent annualized after 2.8 percent the quarter before.

Year-on-year, productivity was down 0.1 percent in the fourth quarter, compared to up 1.2 percent in the third quarter. Year-ago unit labor costs were down 0.9 percent, compared to up 1.8 percent in the third quarter.

Productivity numbers are still volatile even with annual revisions. But the latest numbers reflect a softening in output growth. The Fed will be focusing on slow growth with expectations for gradual improvement in coming quarters. Monetary policy likely is not going to tighten soon.

Market Consensus Before Announcement
Nonfarm business productivity for the fourth quarter declined an annualized 1.8 percent, following a 3.7 percent jump in the third quarter. Unit labor costs increased 2.7 percent after falling an annualized 2.3 percent in the third quarter. Output growth softened to 3.2 percent in the fourth quarter, following a 6.3 percent jump the prior quarter. Compensation growth posted at 0.9 percent annualized after 1.3 percent the quarter before. Year-on-year, productivity was unchanged in the fourth quarter, down from 1.3 percent in the third quarter. Year-ago unit labor costs were up 1.9 percent, compared to up 0.9 percent in the third quarter.

Definition
Productivity measures the growth of labor efficiency in producing the economy's goods and services. Unit labor costs reflect the labor costs of producing each unit of output. Both are followed as indicators of future inflationary trends.



Description
Productivity growth is critical because it allows for higher wages and faster economic growth without inflationary consequences. In periods of robust economic growth, productivity ensures that inflation will remain well behaved despite tight labor markets. Productivity growth is also a key factor in helping to increase the overall wealth of an economy since real wage gains can be made when workers are more productive per hour.

Productivity and labor cost trends have varied over the decades. In the late 1990s, some economists asserted that dramatic productivity advances (based on new technologies) were then allowing the economy to sustain a much faster pace of growth than previously thought possible. Initially, some Fed officials expressed skepticism but later decided that productivity gains had helped boost economic growth and potential GDP growth during the 1990s. That is, the economy could grow faster than previously believed without igniting inflation.

Determining the source of productivity gains has become trickier over the last decade as new technology continues to be incorporated into production - not just in the U.S. but overseas also. Similarly, retraining U.S. workers has been sporadic. Not just low skill jobs are outsourced but now many highly skilled jobs such as programming and accounting are as well. Nonetheless, highly skilled professional jobs have been increasingly difficult to fill during times of high demand. Despite the cross currents in labor market trends, long-term productivity gains are important for maintaining growth in labor income and keeping inflation low.

But in the short-term, output and hours worked can shift sharply just due to cyclical swings in the economy. During the onset of recession, output typically falls before hours worked. This can result in a temporary drop in productivity and a spike in unit labor costs. So, while long-term productivity determines the "speed limit" for long-term growth, one should not be misled by short-term cyclical gyrations in productivity numbers as reflecting the true, underlying trend.