KEY DATA: Productivity: 3.0%; Labor Costs: +0.5%/ Layoffs: 29,831/ Claims: down 5,000
IN A NUTSHELL: “Despite an extremely tight labor market where companies are not cutting workers, labor costs remain under control.”
WHAT IT MEANS: If the economy is to accelerate, productivity will have to increase faster than the pathetic pace we have seen over the past few years. And it may be doing that. Worker output rose sharply in the third quarter even as hours worked increased modestly. This led to a jump in productivity, which kept labor costs under control. The quarterly rise in productivity was the largest in three years while the 1.5% increase over the year was the best in two years. That said, productivity is still growing too slowly, given the modest rise in the labor force, to sustain growth much above 2.25%. And, it needs to be pointed out that the decline in payrolls in September, which was likely an aberration, hyped the productivity increase. The number of hours worked expanded at the slowest rate in two years. So, let’s enjoy this report while we can but at the same time, we need to be careful assuming it will be sustained.
Tomorrow is employment Friday and it is likely that payrolls rebounded sharply from the first decline in seven years. Reinforcing that belief was the Challenger, Gray and Christmas report on layoffs. The number of job cuts announced was modest in October and the ten-month total was the lowest in twenty years, when the dot.com boom was nearing its peak. Companies are having a tough time filling job openings so they are keeping as many workers as possible. Since job gains are the difference between hiring activity and job reductions for any reason, when cutbacks slow, the net number of new people hired rises.
And if you don’t think the layoff announcement numbers mean anything since they are just announcements not actual cuts, the jobless claims data should erase those beliefs. New claims for unemployment insurance declined last week and are at historic lows.
MARKETS AND FED POLICY IMPLICATIONS: It is good to see that productivity is improving, though as I pointed out, I am not so sure that is sustainable. Nevertheless, labor costs are under control and that has allowed the earnings season to look pretty good. But it also indicates that worker incomes are not growing fast enough to allow spending to surge. Indeed, on a year-over-year basis, real hourly compensation has declined for four consecutive quarters. It is hard to spend more when your spending power is declining. The way you do that is by reducing savings and the savings rate is already too low. So, while the data point to a solid economy, they also reinforce the view that growth is not likely to remain strong for an extended period without improved wage gains. Will investors see it that way? Actually, with the new Fed Chair to be named and the October employment report only a day away, I don’t think today’s reports will change a whole lot of thinking.