KEY DATA:  ISM (NonMan.): -2.4 points; Activity: -8.4 points; Orders: -0.4 point; Employment: -2.4 points / Productivity: +6.6%; Annual: +1.9%; Labor Costs: +0.3%; Annual: +3.3%/ Claims: -23,000/ Layoffs: +19,064

IN A NUTSHELL: “Despite rapidly rising wages last year, businesses managed to keep labor costs under control by growing productivity solidly.”

WHAT IT MEANS: Signs of a moderating, but not a weak economy continued to grow.  The Institute for Supply Management’s reading of activity outside the manufacturing sector declined moderately in January.  The overall index level was the lowest in a year.  That said, it is not low, just lower.  Still, almost every measure showed a slowdown in growth and there was one major warning sign.  General business activity dropped sharply, as a significantly greater percentage of respondents indicated activity declined over the month.  There was also a slowdown in hiring, but it still continued at a moderate pace.  Order growth eased but remained strong.    

Economists always argue that operating costs are dependent not just on labor expenses, but on the ability of businesses to run efficiently and raise productivity.  The nonfarm corporate sector did that quite well in 2021.  Fourth quarter productivity surged as output jumped significantly faster than hours worked.  Consequently, labor costs increased modestly despite a sharp rise in wages.  Unfortunately for workers, the surge in wage gains didn’t overcome the rise in prices, so real, inflation-adjusted wages fell at the end of the year.  For all of 2021, real wages were up a measly 0.5%.  At the same time productivity jumped at a strong pace on an annual basis, which has helped earnings. 

The labor market remains tight.  The surge in jobless claims we saw a few weeks ago has largely been unwound and the level is where it would be in a market where jobs are in great supply, but workers aren’t.  That point was reinforced by the Challenger, Gray and Christmas January Layoff Announcement Report.  Layoffs were modest, especially when adjusted for two special cases: Unvaccinated workers and a plant fire that destroyed a QVC warehouse. 

IMPLICATIONS:There are all sorts of doom and gloom reports being written about first quarter growth.  Indeed, we could see a negative number.  But just as that headline would be depressing, it would be as misleading as the huge growth number posted in the fourth quarter.  Last year ended on an up note because inventories expanded massively.  Over seventy percent of the growth came from the outsized inventory build.  Meanwhile, as I pointed out in my commentary, consumption and business fixed investment grew only moderately.  During the current quarter, inventories could constrain growth.  But don’t be surprised if both consumer spending and business investment are solid.  Abstracting the massive inventory swings, you will likely find an economy that is growing at a pace in the 2.5% range, give or take a half percentage point.  Growth may have decelerated a little faster than expected, but that is because most economists expected another federal stimulus package to be passed.  It is doubtful that will happen, so the extra support from the government is subtracted from previous estimates.  The economy is not faltering.  It is moderating.  But due to the huge swings in government stimulus actions and inventory changes, the overall economic growth rates have become extremely volatile.