Econoday Report: Productivity and Costs 7, 2006

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Productivity and Costs

Definition
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 3/7/06 For Q4 Revised 2005

Nonfarm productivity, Q/Q change, SAAR
Actual	-0.5%
Consensus	-0.1%
Consensus Range	-0.6% to 0.0%
Previous	4.1 %

Unit labor costs, Q/Q change, SAAR
Actual	3.3%
Consensus	3.0%
Consensus Range	2.8% to 3.5%
Previous	-0.5 %

Highlights
Fourth-quarter's productivity dip was shaved only slightly, slipping a revised 0.5% and just 1 tenth better than the initial release. A sharp 6 tenths upward revision to output growth to 1.5% was offset by a 5 tenths upward revision to hours worked.

Despite the quarter's dip in productivity, labor costs remained tame. Quarter-to-quarter costs did rise 3.3% -- but year-on-year they rose only 1.3% vs. a year-on-year productivity rate of 2.5%. And real compensation (inflation adjusted) contracted, down an unrevised 0.4%.

The apparent rebound in output currently underway is likely to make fourth-quarter productivity a forgotten curiosity. Growth remains strong and wage pressures contained, a plus for the economic outlook and posing no new risks for Federal Reserve policy makers.

Market Consensus Before Announcement
The Labor Department initially estimated that nonfarm productivity fell at a 0.6 percent rate in the fourth quarter, after growing at a 4.5 percent rate in the third quarter. This estimate could be revised up since the Commerce Department reported that real GDP grew at a 1.6 percent rate in the fourth quarter rather than at a 1.1 percent rate as first reported.

Nonfarm productivity Consensus Forecast for Q4 05: -0.1 percent rate
Range: -0.6 to 0.0 percent rate

Unit labor costs Consensus Forecast for Q4 05: 3.0 percent rate
Range: 2.8 to 3.5 percent rate

Trends

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.

Data Source: Haver Analytics

2006 Release Schedule

Released On: 2/2 3/7 5/4 6/1 8/8 9/6 11/2 12/5

Released For: Q4 Q4r Q1 Q1r Q2 Q2r Q3 Q3r