Tuesday, March 6, 2007

Productivity Down, Labor Costs Up

From CBS Marketwatch:

The U.S. economy appears less productive and more inflation-prone than suspected.

Productivity of the U.S. nonfarm business sector rose at a 1.6% annual rate in the fourth quarter, weaker than the 3.0% pace estimated a month ago. Read full government report.

Unit labor costs -- a gauge of wage push inflationary pressures - were revised higher to a 6.6% annualized gain from a 1.7% increase.
Unit labor costs are the costs paid to workers to produce one "unit" of output. This is the largest quarterly gain since the first three months of 2006.

Unit labor costs have increased 3.2% in the past year, the fastest pace since 2000.

From Bloomberg:

U.S. workers were less productive last quarter than initially estimated and labor costs jumped, making it harder for the Federal Reserve to reduce interest rates even as manufacturing and housing continue to slump.

Productivity, a measure of how much an employee produces for each hour of work, rose at an annual rate of 1.6 percent, down from the 3 percent pace reported last month, the Labor Department said today in Washington. Labor costs climbed 6.6 percent, reflecting a one-time increase in bonuses. Separately, the Commerce Department said factory orders fell in January by the most in more than six years.

The figures mean inflation may be slow to dissipate even though economic growth is tailing off, creating headaches for Fed Chairman Ben S. Bernanke as concerns about a possible 2007 recession mount. Housing, whose slump triggered the slowdown in growth, so far shows few signs of bouncing back: A report from the National Association of Realtors today showed fewer Americans signing contracts to buy previously owned homes.

This is terrible news -- on a terrible news day.

There has been a fair amount of speculation about when the Fed would lower rates. This news hems the Fed in a heck of a lot more. Lower productivity means businesses are less able to absorb inflationary pressures (rising input prices). That means they will pass increasing costs onto consumers.

The higher labor costs -- even if it is a one time affair -- add to inflationary pressures as well. The one-time factor may help to limit this effect, but the number will still probably get some notice.