US Productivity Falls For First Time Since 2008 As Labor Costs Increase Less Than Expected

Tyler Durden's picture

In another indication that the impact of the existing trillions of stimulus have now expired and the economy is once again following the path of least resistance to massive deleveraging, elsewhere known as deflation, productivity declined by an annual rate of 0.9 percent after rising at a
revised 3.9 percent rate in the first quarter, the first time since the
fourth quarter of 2008 that output per worker fell. This was far weaker than the consensus seeking a 0.2% increase. Labor costs, which are watched by the Fed to gauge inflation, added a double whammy, increasing at a 0.2 percent annual rate after shrinking at a revised 3.7 percent rate in the first three months this year. This was also weaker than expectations of 0.9%, further confirming the deflationary phase of the current economic cycle, and further boxing the Fed which now needs to do something drastic before a full blown deflationary wave sweep the economy.

From the BLS release:

Nonfarm business sector labor productivity decreased at a 0.9 percent annual rate during the second quarter of 2010, the U.S. Bureau of Labor Statistics reported today, with output and hours rising 2.6 percent and 3.6 percent, respectively. (All quarterly percent changes in this release are seasonally adjusted annual rates.) The decline in output per hour follows five quarters of strong productivity growth. The second-quarter gain in hours worked was the largest since the first quarter of 2006 when hours rose 4.1 percent. From the second quarter of 2009 to the second quarter of 2010, both productivity and output increased 3.9 percent; hours were unchanged (chart 1, tables A and 2).

Unit labor costs in nonfarm businesses edged up 0.2 percent in the second quarter of 2010, the result of productivity declining more than hourly compensation. Over the last four quarters, unit labor costs fell 2.8 percent as output per hour increased faster than hourly compensation (chart 2, tables A and 2).

BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.

Manufacturing sector productivity grew 4.5 percent in the second quarter of 2010, as output rose 8.3 percent and hours worked increased 3.6 percent. Durable manufacturing sector productivity increased 11.2 percent as the increase in output outpaced the increase in hours. The reverse was true for nondurable manufacturing industries, where productivity decreased 2.8 percent, given that the increase in hours was larger than the increase in output (tables A, 3, 4 and 5).

Unit labor costs in manufacturing declined 6.1 percent in the second quarter of 2010 and fell 6.9 percent over the last four quarters (tables A and 3). The four-quarter decline was the largest in the series, which begins in the first quarter of 1988.

The data sources and methods used in the preparation of the manufacturing output series differ from those used in preparing the business and nonfarm business output series, and these measures are not directly comparable. See Technical Notes for further information on data sources (page 6).

Nonfinancial corporate sector productivity increased 9.1 percent in the first quarter of 2010 as output and hours rose 11.4 percent and 2.1 percent, respectively (tables D and 6).