Wednesday, June 6, 2007

Productivity Revised Lower

From the BLS:

The Bureau of Labor Statistics of the U.S. Department of Labor today reported revised productivity data--as measured by output per hour of all persons--for the first quarter of 2007. The revised seasonally adjusted annual rates of productivity change in the first quarter were:

0.5 percent in the business sector and
1.0 percent in the nonfarm business sector.

In both sectors, the first-quarter productivity gains were smaller than the preliminary estimates reported on May 3, due to downward revisions to output growth.

In manufacturing, the revised productivity changes in the first quarter

2.4 percent in manufacturing,
2.2 percent in durable goods manufacturing, and
1.8 percent in nondurable goods manufacturing.

Manufacturing productivity growth was slower in the first quarter of 2007 than reported on May 3, reflecting downward revisions to output per hour in both durable goods and nondurable goods industries. Output and hours in manufacturing, which includes about 12 percent of U.S. business-sector employment, tend to vary more from quarter to quarter than data for the aggregate business and nonfarm business sectors. First-quarter measures are summarized in table A and appear in detail in tables 1 through 5.

This report has the markets selling because the decrease in productivity implies companies have less room to absorb costs, which further implies inflationary pressures may be increasing.

Combine that development with the ECB's interest rate increase today and you have a market that is looking at rate increases in the near futures. This is from the same market that was looking for a rate cut a few months ago.

In addition, Bernanke once again warned of inflationary pressures in his speech yesterday.

However, although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside. In particular, the continuing high rate of resource utilization suggests that the level of final demand may still be high relative to the underlying productive capacity of the economy.

Bernanke has made the exact same statement in the previous few Fed policy releases -- but no one listened. I am pointing this out because I am in a self-congratulatory mood and want to point out that I have consistently said the Fed would not lower rates anytime soon.

Hey -- when you get something right in economics you really have to talk about it because it happens far less frequently than we would like to admit.