Productivity & Costs (Q1): Productivity Declines, Labor Costs Increase

May 4, 2016
Bottom Line: Productivity fell in 2016 Q1 and has increased only slightly over the past year. As business have continued to hire in the recovery that is now in excess of 6 years old, trend productivity gains have decelerated. Meanwhile, on the same medium term trend, compensation has been quite volatile but still relatively flat. Finally, and on the same medium term trend basis, unit labor costs initially accelerated during the first half of the recovery but have since increased only modestly. They have increased by 1.7% annualized over the last eight quarters. Nonfarm Business Productivity FELL by 1.0% in 2016 Q1, compared with market expectations for a decrease of 1.3%. Productivity is still 0.6% ABOVE its year ago level; as recently as 2009 Q4, productivity was a robust 5.6% ABOVE its year earlier level. This is a typical post-recession pattern with productivity soaring in the late recession/early recovery period before settling back to a more sustainable pace as the expansion lengthens. Output ROSE by 0.4%, in line with the Q1 increase in nonfarm business GDP. With its recent gains, output is now 2.2% ABOVE its year ago level. Hours Worked ROSE by 1.5% because of the modest gains in private employment and a steady workweek. Hours worked are now 1.6% ABOVE their year ago level. Compensation ROSE by 3.0% and is now 2.8% ABOVE its year ago level. Quarterly compensation has been quite volatile recently but the trend has been relatively flat over the past couple of years. Unit Labor Costs ROSE by 4.1%, compared with market expectations for an increase of 3.3%. Unit labor costs accelerated sharply between 2009 Q4 and 2011 Q1 to 2.8% and then decelerated and are now 2.3% ABOVE their year ago level.
Article by contingentmacro