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. Why Investors Care
| Released on 3/6/07 For Q4 Revised 2006 | |||||||||||||||||||||||||
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Highlights
Four-quarter productivity was revised down sharply to an annualized 1.6 percent - down from the initial estimate of 3.0 percent. The revision matched market expectations for a 1.6 percent revised gain. The downward revision in productivity essentially reflected the downward revision in real GDP for the fourth quarter. The output component in productivity is based on many common source figures as GDP. Fourth quarter output growth was revised down to 2.5 percent from a 4.2 percent annualized increase. Hours worked was revised down to 0.9 percent from a 1.2 percent yearly gain. Year-on-year, productivity rose 1.4 percent, following 0.9 percent in the third quarter.
Unit labor costs increased a much higher-than-expected 6.6 percent, up from a 1.1 percent rise in the third quarter and up from the initial fourth quarter estimate of 1.7 percent. The consensus had expected a 3.0 percent boost in unit labor costs for the fourth quarter. Year-on-year, unit labor costs rose 3.4 percent, up from 2.6 percent rate in the third quarter.
Similar to unit labor costs, compensation was revised up to a sharp 8.2 percent jump from the initial estimate of 4.8 percent. The upward revision in both compensation and unit labor costs reflects revisions to income seen in one-time bonuses and stock options seen in the GDP report. As such, these numbers really do not reflect a jump in underlying labor costs but actually reflect strength in corporate revenues.
Today's report on its face is a negative for inflation data. However, special factors make the data look worse than they really are. Certainly productivity and unit labor costs are important over the long run but today's report provides no real insight into inflation trends. Markets should put today's numbers aside and look forward to Friday's employment report which includes several labor pressure numbers, including wages and the unemployment rate.
Nonfarm productivity for the initial estimate for the fourth quarter was up a sharp 3.0 percent compared to a 0.1 decline in the third quarter. Since the last release, fourth quarter real GDP was revised down sharply from an initial 3.5 percent boost to a 2.2 percent increase. Much of the same data that go into real GDP also go into the output portion of production and a significant downward revision is almost certain. Similarly, unit labor costs are likely to be revised up from the initial estimate for the fourth quarter of an annualized 1.7 percent.
Nonfarm Productivity Consensus Forecast for revised Q4 06: 1.6 percent
Range: 1.0 to 2.1 percent
Unit Labor Costs Consensus Forecast for revised Q4 06: 3.0 percent rate
Range: 1.9 to 6.2 percent rate
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Nonfarm productivity growth has remained healthy during this expansion, but it has prevented employment from growing very fast and this hurt income growth to some extent. Unit labor costs tend to fall when productivity growth accelerates and then rises as productivity growth abates. |
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