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 2/6/08 For Q4 2007 | |||||||||||||||||||||||||
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Highlights
Productivity and labor costs in the fourth quarter were not as bad as markets had expected but clearly reflected a slowing in the economy. Fourth quarter productivity decelerated to an annualized 1.8 percent increase, following a 6.0 percent surge in the third quarter. The fourth quarter rise was above the market forecast for a 0.5 percent annualized increase. Unit labor costs rebounded 2.1 percent annualized in the fourth quarter, following a 1.9 percent decline in the third quarter. The consensus had forecast a 3.0 percent rebound in unit labor costs for the fourth quarter.
Compensation remained strong with a 3.9 percent annualized boost in the fourth quarter, following a 4.0 percent rise in the third quarter. However, a more recent slowing in employment growth suggests that compensation will be softening in the first quarter.
Year-on-year, productivity was up 2.6 percent in the fourth quarter, unchanged from the previous quarter. Year-on-year, unit labor costs in the fourth quarter came in at up 1.0 percent, down from up 3.0 percent in the third quarter. The slowing mainly reflected the quarterly declines in the second and third quarters of 2007. Year-on-year, compensation in the fourth quarter was up 3.7 percent, compared to up 5.7 percent in the third quarter.
Today's report mainly reflects a cyclical slowing in output in the fourth quarter and does not suggest any underlying changes in the cost structure of the U.S. economy. The Fed will see the numbers as merely cyclical in nature and will focus on other data for checking the pulse of inflation.
Nonfarm productivity and labor costs in the third quarter were highly favorable for low inflation but that is likely to change in the fourth quarter. Third quarter productivity rose an annualized 6.3 percent increase, following a 2.2 percent gain in the second quarter. Unit labor costs dropped 2.0 percent annualized in the third quarter, following a 1.1 percent decline in the second quarter. But the anemic 0.6 percent annualized rise in real GDP for the fourth quarter points to a significant reversal of the third quarter productivity and unit labor cost numbers - many of the GDP source data are also used for productivity and unit labor costs.
Nonfarm Productivity Consensus Forecast for initial Q4 07: +0.5 percent
Range: -0.6 to +2.3 percent
Unit Labor Costs Consensus Forecast for initial Q4 07: +3.0 percent rate
Range: +2.5 to +4.5 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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