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 5/7/08 For Q1 2008 | |||||||||||||||||||||||||
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Highlights
Productivity and labor costs in the first quarter both came in better than expected and provide a nice backdrop for potential improvement in inflation. But the negative is that the improvement was based on a drop in hours worked, indicating that income growth may be slowing for the consumer. First quarter productivity improved to an annualized 2.2 percent increase, following a 1.8 percent gain in the fourth quarter. The first quarter rise advance was above the market forecast for a 1.7 percent annualized increase. Unit labor costs moderated with a 2.2 percent annualized increase, following a 2.8 percent gain in the fourth quarter. The consensus had forecast a 2.6 percent increase in unit labor costs for the first quarter. Again, the improvement in productivity and labor costs was directly tied to hours worked, which fell an annualized 1.8 percent, following a 1.6 percent drop in the fourth quarter.
While hours worked fell, compensation per hour only moderated slightly with a 4.4 percent annualized boost in the first quarter, following a 4.6 percent boost the prior quarter.
Year-on-year, productivity was up 3.2 percent in the first quarter, compared to up 2.9 percent the previous quarter. Year-on-year, unit labor costs in the first quarter stood at up 0.2 percent, down from up 0.9 percent in the prior quarter. Year-on-year, compensation per hour in the first quarter was up 3.4 percent, compared to up 3.9 percent in the fourth quarter.
Today's report is favorable toward an improvement in inflation down the road if these trends continue. But the report also suggests sluggishness in aggregate earnings for consumers since hours worked have been slipping. But this is the scenario that the Fed has envisioned and the Fed for now appears to be on track for its forecasts of sluggish growth, productivity gains, and hopefully improvement in inflation. Bonds should like this report but movement into other instruments or equities simply for better returns may be offsetting.
Nonfarm productivity has been weak due to the fourth quarter slowdown in output. Fourth quarter productivity came in at an annualized 1.9 percent. Raising the specter of inflation pressures rising in the labor sector was a 2.6 percent increase in fourth quarter unit labor costs. While first quarter GDP was just as anemic as the fourth quarter with a 0.6 percent annualized gain, we could see some improvement in productivity and labor costs as hours worked appeared to slow in the latest quarter.
Nonfarm Productivity Consensus Forecast for initial Q1 08: +1.7 percent
Range: +0.8 to +2.2 percent
Unit Labor Costs Consensus Forecast for initial Q1 08: +2.6 percent
Range: +1.5 to +3.5 percent
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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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