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 3/5/08 For Q4 Revised 2007 | |||||||||||||||||||||||||
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Highlights
Today's revisions to productivity and unit labor costs may be making the Fed's job tougher as costs were revised up more than productivity. Fourth quarter productivity was revised up marginally to an annualized 1.9 percent from the earlier estimate of 1.8 percent and compared to market expectations of 1.8 percent. But raising the specter of inflation rising from the labor sector was an upward revision to unit labor costs to an annualized 2.6 percent from the original estimate of 2.1 percent for the fourth quarter and compared to the market forecast for a 2.1 percent gain. While there is a cyclical component to the fourth quarter numbers (output swings such as the latest deceleration in output), the bump up on labor costs will raise chatter that the Fed is easing too much and is fueling inflation down the road. It is doubtful that today's numbers will change the Fed's current focus on fighting recession but the markets are likely to vote their displeasure. In these circumstances, there typically is upward pressure on longer-term interest rates due to a boost in inflation expectations and we may see that. Though longer rates may rise, the inflation concern could still weigh on the dollar and equities could turn negative based on fears that the Fed will not ease as expected. But for now the Fed will likely stay its course and the markets will adjust accordingly.
Year-on-year, productivity was up 2.9 percent in the fourth quarter, unchanged from the third quarter. Year-on-year, unit labor costs in the fourth quarter came stood at 0.9 percent, down from up 2.8 percent in the prior quarter.
Nonfarm productivity slowed in the fourth quarter, reflecting a slowing in the economy. In the initial estimate, fourth quarter productivity decelerated to an annualized 1.8 percent increase, following a 6.0 percent surge in the third quarter. Unit labor costs rebounded 2.1 percent annualized in the fourth quarter, following a 1.9 percent decline in the third quarter. Given that fourth quarter GDP was unrevised at a 0.6 percent growth rate, there are not likely to be any dramatic revisions to fourth quarter productivity or unit labor costs. However, some revisions may occur due to somewhat different methodologies in measuring output and hours worked were revised slightly.
Nonfarm Productivity Consensus Forecast for revised Q4 08: +1.8 percent
Range: +1.0 to +2.0 percent
Unit Labor Costs Consensus Forecast for revised Q4 08: +2.1 percent rate
Range: +1.4 to +4.2 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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