KEY DATA: Productivity: -0.6%; Labor Costs: +3%/ Trade Deficit: $0.1 billion narrower/ Layoffs (Over-Year): -27,539/ Claims: -19,000
IN A NUTSHELL: “The tightening labor market is raising costs but firms are failing to improve productivity to offset those increases.”
WHAT IT MEANS: You can get growth either through adding workers or working more efficiently (or, of course, both). Well, firms are adding workers, but they are showing few signs that they are able to use those workers more effectively. Productivity fell in the first quarter, which was not really a major surprise given the weak economic growth during the quarter. Since payroll gains were strong, it was clear that we would get an ugly labor cost number and we did. Unit labor costs, a key measure of the cost of producing a good, rose sharply. These data bounced around sharply, as does GDP, so it would normally not be major concern. But given that productivity has been growing at a pretty pathetic 0.6% pace for the past five years, today’s report provides little comfort that anything is changing. And if you don’t get a surge in productivity, the ability of the economy to accelerate will remain limited.
The trade deficit was largely flat in March, as exports and imports declined by the same amount. That is hardly good news since we would like to see both increasing. On the export side, we sold more food and capital goods, but that was just about it. Foreign demand for our motor vehicles, consumer products and industrial supplies dropped. Oil played a major role in that decline, but some of that may have been related to the decline in prices. Imports, though, also fell, hardly a sign that the U.S. economy is surging along. The only thing we bought more of was motor vehicles. Given the weakening sales numbers (the April pace was disappointing and that followed a truly soft March number), I am not sure that is a good thing. Adjusting for prices, it looks like the trade deficit estimate in the first GDP report was on target, so if the growth rate is changed, it is not likely to come from any major revision to the deficit.
Firms are holding on to workers quite tightly. The Challenger, Gray and Christmas April report on layoffs showed that workforce cutbacks continue to decline from 2016 levels. Just about the entire drop came from the new-found stability in the energy and computer sectors. On the other hand, retailers are closing stores like crazy and that is pumping up the layoff numbers.
Unemployment claims dropped back to labor shortage levels. That reinforces the view from the layoffs numbers that firms simply will not fire someone unless they have to, such as when they close stores.
MARKETS AND FED POLICY IMPLICATIONS: Today’s story is the productivity numbers. You cannot grow at a 3% pace if productivity is increasing at a 1% pace. That is because the labor force is just not there. There simply is no reserve army of the unemployed or underemployed to call on and hours worked are already fairly high. The increase in hours worked during the first quarter was less than what we saw in 2016. While jobs may be declining in traditional retailing, they are growing in Internet retailing, warehousing and distribution. Technology still requires people, either directly or indirectly. Robots may replace some workers, but a totally robotic economy is not in the near future. So, if you believe that all you need to do is loose the animal instincts of the business sector and growth will magically surge, you might want to reconsider that view. As for the health care bill, I am fascinated by the idea that the way to introduce more private sector competition into the health care system is to ramp up government payments to companies. Since when did Republicans start believing that the government should subsidize the private sector and that more government spending was a good thing? Please, someone explain this to me.