Category Archives: Productivity

Economic Indicators, Productivity, Weekly Jobless Claims

Third Quarter Productivity and Weekly Jobless Claims

KEY DATA: Productivity: +2%; Year-over-Year: +0.9%; Unit Labor Costs: +0.3%; Year-over-Year: +2.4%/Jobless Claims: 278,000 (down 10,000)

IN A NUTSHELL:   “As the labor market continues to firm, there are growing hints, but still just hints, that wage pressures are starting to build.”

WHAT IT MEANS:  Okay, the election is over and we will have to wait until January for the new Congress to start creating whatever chaos they want to create, so let’s get back to economic reality.  Businesses are doing what they can to keep labor costs down and in the summer, they pretty much succeeded.  Third quarter productivity gains almost completely offset labor compensation increases.  That led to a modest rise in labor costs, which is good news for prices.  These data are wildly volatile, so it is worthwhile looking at the changes over the year.  Since the third quarter of 2013, productivity rose modestly while labor costs were up fairly solidly.  And, for the first three quarters of the year, productivity increased by less than 1% while, labor compensation rose by 3.1%.  Even adjusting for inflation, compensation is up by 1.3% so far this year.  It is possible that inflation-adjusted earnings could rise at the fastest pace since 2007.  That is a clear sign that the tightening labor market is forcing firms to pony up a little more money. 

There were other data on the labor market, but they were more mixed.  Weekly jobless claims dropped solidly and the four-week average remains at historically low levels.  However, The Challenger, Gray and Christmas layoff announcement report jumped in October to its second highest level this year.  It was noted that October and November tend to be big months for layoffs as firms set business plans, so we should probably wait and see how the rest of the year plays out.  Also, we really don’t know where those cuts will come or if they will even take place.  That said, layoff notices are down by over 4% so far this year.

MARKETS AND FED POLICY IMPLICATIONS: Firms keep pushing their workers harder and harder as they hold back both their hiring and compensation.  But the dam seems to be breaking.  Productivity gains this year will probably be in the one percent range, making it four consecutive years of modest increases.  With compensation rising, there is pressure on margins and firms are worried about paying workers even more.  But it’s the tightening labor market that will likely be the driving force in 2015 and that means either firms will have to start raising prices or shrinking margins.  Most likely we will see a little of both.  But that doesn’t mean earnings have to weaken.  If economic growth is above 3%, as I believe it will be, companies will have to make it the old fashion way, through volume.  Are investors thinking about the implications or modest productivity gains and rising labor costs?  Probably not, as the headlines don’t shout rising wage pressures.  But the Fed members know the devil is in the details and they say a lot.  Regardless, tomorrow is Employment Friday and we will see what happened with October payrolls and the unemployment rate.  I expect job gains to be well north of 250,000 while the unemployment rate remains at 5.9%.

Economic Indicators, Productivity, Unit Labor Costs

Second Quarter Productivity and Costs

KEY DATA: Productivity: +2.5%; Output: +5.2%; Real Hourly Compensation: +0.1%; Unit Labor Costs: 0.6%

IN A NUTSHELL: “Productivity rebounded, keeping business costs low as wage gains remain largely under control.”

WHAT IT MEANS: Rising wages don’t have to be a major problem for firms as long as workers offset those increases with improved output.  Unit labor costs, which reflect the balance between wages and production, edged upward in the spring.  Strong spring economic growth, a reflection of the rebound from the winter weather-restrained production in the first quarter, offset an increase in wages.  Indeed, there was a huge rise in labor costs in the first quarter, which points out that the quarter-to-quarter numbers really don’t mean a whole lot.  Smoothing out the data by looking at the year-over-year numbers gives a better indication of what is happening with productivity and costs.  If you want to know about the potential for consumer spending to rise faster, just look at compensation adjusted for inflation.  Real hourly compensation was at the same level in 2013 as it was in 2007.  But that may finally be changing, at least a little.  While workers inflation-adjusted income fell by 0.3% in 2013, it is rising at about a 1.5% during the first half of the year.  If wage gains accelerate, as I expect, we might actually hit 2%.  Will that cause business labor costs to rise?  Probably, but not necessarily a whole lot.  Productivity will likely rise about 1.5% to 2% this year so labor costs should be mostly offset by additional worker output.  But we may see unit labor costs look a lot less positive for businesses than they have been the case for a decade.

MARKETS AND FED POLICY IMPLICATIONS: Labor costs are and will be the focus of attention for a very long time.  Yesterday’s unemployment claims report points to strong job gains and a decline in the unemployment rate.  Full employment is on the horizon, whether the business community wants to accept that or not.  Today’s report doesn’t say that labor costs are a problem yet, but it hints at some improvement in pay.  That is good.  Real worker compensation has essentially gone nowhere for six years, so how can anyone think that people will be able to shop ‘till they’re tired let alone ‘till they drop unless wages rise solidly?  The Fed members, at least the inflation hawks, will likely look at the report as supporting their view that it is time to change direction.  But investors will probably take solace from the headline number, which implies that labor costs are again well contained.  These numbers are hugely volatile and believing the quarterly numbers mean anything is a short-cut to muddled thinking.  Regardless, with geopolitical issues heating up, who knows what will drive the markets these days.