Merk Investments: Non-Farm Productivity/Unit Labor Costs
The preliminary estimate of non-farm productivity advanced 2.2% in the second quarter of 2008, while productivity in the business sector increased 2.3%. The gains in the both sectors were driven by increases in output and a modest decline in hours worked during the quarter. However, output per hour among non-financial corporations rose only 1.0%. In the manufacturing sector productivity fell by -1.4% on the back of a -3.5% fall in durable goods manufacturing. Productivity in the non-durable manufacturing sector advanced 0.7%.
Unit labor costs, which reflect changes in both hourly compensation and productivity advanced 1.3% overall in the second quarter. The business sector saw a 1.5% advance in unit labor costs, where as the manufacturing sector saw a 6.1% increase. Real compensation overall declined -1.4% and -1.2% in the business sector. Unit labor costs among non-financial corporations increased 3.9% and real compensation advanced 0.6%.
The BLS released revisions for non-financial corporations, which saw output revised down sharply in Q1’08 to -0.1% from 3.2%, which resulted in a downward revision in productivity to 1.0% for the quarter. For the three previous years, output in the non-financial corporate sector was revised down to 1.6% in 2007, up to 4.4% in 2006 and up to 43% in 2005. Productivity for 2007 was revised down to 0.9%, up to 2.1% in 2006 and up to 2.6% in 2005.
The overall numbers remained positive and the very modest increase in unit labor costs should provide a good measure of material comfort to the Fed. The probability that productivity continued to advance in what can charitably be described as sluggish economic conditions is an undeniable bright spot in the economy. Perhaps, more important is that labor costs have moderated during a time when the sharp increase in energy and commodity costs might have caused workers to demand higher wages.
But, before the market takes too much joy in these numbers there are some signs of concern. The revisions for output and productivity in the first quarter are not positive and the decline in productivity among non-financial corporations and the elevated reading in unit labor costs in this critical sector are troubling. We partially attribute the long run improvement in overall productivity to increasing efficiencies among non-financial corporations. The data for the first half of the year in this sector does not suggest a major turning point in either productivity or unit labor costs, but does bear close observation over the coming quarters.
Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy
|
