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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
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Highlights
Productivity and labor costs for the third quarter were sharply more favorable than expected. Third quarter productivity surged to an annualized 4.9 percent increase, following a 2.2 percent gain in the second quarter. The third quarter advance was well above the market consensus projection for a 3.2 percent annualized boost. The faster growth in productivity reflected strong growth in output while hours worked edged down. For the third quarter, output rose an annualized 4.3 percent, after a 4.2 percent increase in the previous quarter. Meanwhile, hours worked dipped 0.5 percent annualized, following a 2.0 percent gain in the second quarter.
Not only was the latest productivity number striking, but unit labor costs not only moderated but fell 0.2 percent annualized in the third quarter, following a 2.2 percent increase in the second quarter. The consensus had expected a 1.0 percent gain in unit labor costs for the third quarter. The decline in unit labor costs suggests modest inflation pressure from the labor sector overall.
Compensation growth remained healthy in the third quarter with a 4.7 percent annualized advance, following a 4.4 percent increase in the second quarter. With the strong productivity gain, the latest compensation number does not yet indicate inflation pressure from compensation. However, should productivity slow and compensation continue at this pace, inflation pressure would be up.
Year-on-year, productivity came in at up 2.4 percent in the third quarter, compared to up 0.7 percent the prior quarter. Year-on-year, unit labor costs in the third quarter stood at up 4.3 percent, down from up 5.1 percent in the prior quarter. Year-on-year, compensation stands at up 6.7 percent, compared to up 5.9 percent in the second quarter.
Overall, the numbers reflect modest underlying inflation pressures as of the third quarter and support the Fed's view that the latest interest rate cut was justified to preclude economic weakness in light of then lower inflation risks. Of course, the question moving forward is whether sharply higher oil prices, a declining dollar, and continued economic growth limit further rate cuts. And in terms of labor costs, the Fed will be projecting forward the impact of slower output growth and perhaps downward sticky compensation growth which would be worrisome.
But for today, both the bond and equity markets should like the data given the usual short-term time frame. At least they would if they were not focusing on GM's third quarter loss of $39 billion.
Nonfarm productivity rose an annualized 2.6 percent in the second quarter, reflecting strong GDP growth. With the healthy 3.9 percent boost in third quarter GDP and with moderate hours worked, we should get another good number for third quarter productivity. If so, this would be good news for the Fed on the inflation front.
Nonfarm Productivity Consensus Forecast for initial Q3 07: +3.2 percent
Range: +2.4 to +4.2 percent
Unit Labor Costs Consensus Forecast for initial Q3 07: +1.0 percent rate
Range: +0.5 to +1.8 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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