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2008 Economic Calendar |
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Resource Center » U.S. & Intl Recaps | Release Dates | Why Investors Care | Today's Calendar
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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 8/8/06 For Q2 2006 | |||||||||||||||||||||||||
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Highlights
Nonfarm productivity in the second quarter slowed to a 1.1 annualized percent rise from a revised 4.3 percent jump in the first quarter. This slowing is consistent with the soft GDP number for the second quarter. Annual revisions were released with today's report. Output in the nonfarm business sector rose 2.5 percent in the second quarter while hours worked rose 1.4 percent. The consensus had expected a 0.9 percent rise in labor productivity for the second quarter.
Unit labor costs jumped 4.2 percent annualized in the second quarter, following a 2.5 percent increase in the first quarter. The consensus had expected a 3.8 percent rise in unit labor costs for the second quarter. The latest gain is the largest for unit labor costs since the fourth quarter of 2004 which had a 5.1 percent surge.
Real compensation (inflation adjusted) squeezed out a 0.4 percent annualized increase, following a 4.7 percent surge in the first quarter. Labor, too, is feeling the pinch of higher inflation. It is important to note that the slowing in real compensation is due to higher inflation instead of to a slowing in unit labor costs. Inflation in the second quarter is hitting both management and labor.
On a year-on-year basis, productivity slipped to 2.4 percent in the second quarter from 2.7 percent in the first quarter. Unit labor costs jumped to 3.2 percent year-on-year from 2.0 percent in the first quarter.
Today's report highlights the difficulty of the Fed's interest rate decision later today. Output is slowing while both management and labor are feeling the pinch of inflation. For those still believing the Fed will raise rates for the 18th consecutive time today, today's report adds fodder to that belief given that Fed officials generally view containing inflation as its primary job with job and wealth creation flowing from a stable inflationary environment.
Nonfarm productivity in the first quarter was revised up to a 3.7 percent annualized boost from the initial estimate of a 3.2 percent increase. With the economy slowing and with CPI and PCE inflation remaining high along with wage inflation, productivity and unit labor cost numbers will start getting more attention in the markets. As several Fed officials have noted, productivity gains have kept wage inflation from pushing up overall inflation. If that trend reverses, then there will be concern that recently strong wage numbers will lead to further Fed tightening. The first quarter's healthy productivity number was largely due to strong GDP growth. However, real GDP slowed from 5.6 percent annualized in the first quarter to 2.5 percent in the second quarter and should lead to weaker productivity in the second quarter. The key question is whether this will impact unit labor costs.
Nonfarm Productivity Consensus Forecast for Q2 06: 0.9 percent
Range: 0.3 to 1.9 percent
Unit Labor Costs Consensus Forecast for Q2 06: 3.8 percent rate
Range: 2.5 to 4.4 percent rate
![[Chart]](chart.gif)
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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. |
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