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).

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Number 156's picture

Yeah, deflation is on the way. However we can expect the Congrel Horde to attack with more and more QE missiles.

GIANTKILR's picture

Deflation followed by a hyper-inflation missle.

MachoMan's picture

This needs to be clarified.  On the heels of decades of deleveraging/deflation, we will not all of a sudden wake up and decide to kill ourselves and just print a bunch of money.  (I'm not sure our central planners will even be around in the same form at that time).  Rather, hyperinflation will ONLY come from our outright default/repudiation...  Which will only come after all domestic avenues of potential default/savings have been exhausted.

If we stay out of QE for any remotely lengthy duration, we will not revisit it.  It has to be a continued series...  My guess is that somewhere along the domestic default we decide to throw our hands up and finally get mad about paying foreign creditors while we starve.  But that will be a while. 

SheepDog-One's picture

So DOW up +500 handle today then?

bubba1231's picture

While I agree the economy is headed downhill fast a couple of points need to be made.  One - productivity is a meaninless statistic.  It literally means nothing.  Nothing can be inferrred good or bad from it.  It isn't even worth discussing.  Second, it seems strange to talk about defaltion in the midst of a massive rise in food prices, oil and gold.  We are experiencing the first signs of INFLATION which is a much bigger convern that deflation.  Deflation isn't fun but Inflation destrys countries.

PhotonJohn's picture

Not sure I buy that oil is rising because of inflationary pressure but by mere manipulation. Every time our inventories unexpectedly increase oil goes up. Just seems too disjointed. I am paying $1.29 for hormone free milk right now, I don't think I have ever paid less than $1.50 in my life!

-Michelle-'s picture

I don't think you can really look at milk prices as an indicator.  It's heavily subsidized, for one.  Also, it's a loss leader for most stores.  They mark down milk and eggs heavily to get you in the door.

CrashisOptimistic's picture


Not sure I buy that oil is rising because of inflationary pressure but by mere manipulation. Every time our inventories unexpectedly increase oil goes up. Just seems too disjointed. 


This is the sort of thing that is said all the time about oil.  Oil's price, by the world, is always talked about in terms of demand and manipulation.


Well, sports fans, get ready for SUPPLY to be the factor.


Supply is not what the reading is on the dipstick you poke into a tank in Cushing Oklahoma, and no, it's not about "Reserves" and how they are so huge.  


It's about one thing and one thing only -- what's coming OUT of the ground.  Not what's in the ground.  What's coming out of it.  The moon Titan is practically covered with hydrocarbons, but we don't count those as important in oil price.  Why?  For the same God damned reason you should not care about reserves here under the Earth.


You Can't Get Them.


Oil's production hit a high in 2005.  Every single year since then the price of oil has been higher than 2005's price, but production has never returned to that level, despite the price incentive to get there, and no, don't point at depressed demand.  That didn't exist 2006 and 2007.


SheepDog-One's picture

Deflation is a loss in confidence of a currency.

Inflation is an increase in the supply of a currency.

I find it hilarious all the economic gurus dont even know the definitions of the terms theyre pontificating on daily.

defender's picture

Not true.  Deflation is the lack of money to meet supply, hyperinflation is the loss of confidence. 

Sudden Debt's picture

I think it's clear we should reintroduce the use of whips at the workfloor of the working drones. That will increase productivity for sure. And if that don't help, just rapes their woman and children as a motivator.

Why is it always me that has to come up with the usefull idea's every single time?!

Thunder Dome's picture

Ding Dong, Get Long!!!

The Franchise's picture

America... fuck yeah!

chinaguy's picture

Anyone know if those 350K census workers were included in this survey? I don't see how they could add to "real output".

Captain Archer's picture

So, help me out. Lower producitvity should be a prelude to more layoffs right?

Captain Archer


old_turk's picture

Yes and no.

Lower producivity is really not good ... it destroys margins.  So more layoffs, yes ... but worse than that it means less 'economic' activity which in a macro sense (and what the ECRI has been saying) is that the viability of various businesses are suspect ... meaning more bad debt for the banks and more liquidity from the Fed.

The virtuous cycle is trying to roll over into the oroboros cycle better known as a negative feedback loop.

This is what scares the willies out of the Fed.

old_turk's picture

"the Fed which now needs to do something drastic before a full blown deflationary wave sweep the economy."


Sorry, the Fed's done dramatic ... TARP.  The Fed's done drastic ... QE 1.0.


Now is time for something completely different ... insane, maybe. 

Negative interest rates anyone. 

The Swedes have tried it ... it ain't working ... but hey, QE zombified Japan and we did it anyway.


So whatdayathink?

MachoMan's picture

I agree, it's going to be something completely different...  wait for it...  wait for it...  less QE in a bid to ween off the customer/continue the looting the longest.  They're keenly aware monetary policy has no answer for our current predicament.  In that case, they hit the eject button and, in the end, what nonperforming assets can't be pushed onto the GSEs will be sold to the club for pennies on the dollar as the FED is liquidated.

But yes, something different is in order and I, unlike many, think it will be in the form of reduced QE...  something palatable to our creditors...  large enough to keep the charade going, but small enough not to spook the herd.  They're range bound from QE 1.0...  anything larger now would be a total admission of failure, defeat, and inevitable collapse.  It's either a series of QE lites, decreasing in size (my bet)...  or a total end to participation in await of the firesale.  The new QEs will be vastly more accurate than the "hey you banks just take this shit and don't tell us where it's going" meme from the first...  now is when the monetarists earn their keep in ensuring the charade continues...  (anyone can hack with a machete, they have to break out the scalpel now).

SteveNYC's picture

The working class finally throwing in the towell? "Fuck this productivity thing, no vacations, no pay raise, no benefits, can't even take a fuckin sick day! To hell with this work-thing!"

Rest assured the sheep continue to police themselves, but for how much longer?

bada boom's picture

Yeah, I believe a jetblue employee just stated his opinion on this.

MyFriendMises's picture

That is the best story of the year.  I also read that when the police went to his house to arrest him they believe he was in the middle of having sexual relations.  That is one hell of a day.  Jump out of a plane and got some nookie.  Funny thing is everyone I have talked to is on his side. 

Caviar Emptor's picture

Note the term "Double Whammy" is popping up everywhere! As in the term I coined here a year ago "The Double Whammy Economy".

That's because more and more are recognizing that. yes, it is possible to have simultaneous deflation AND inflation in the same economy, just in different sectors. 

True, this flies in the face of economics orthodoxy and baffles many. But the data are not lying and are trending in the direction of this trend even more. The explanation is fairly simple: we don't live in a demand/supply-driven economy any longer. That's the result of 3-4 decades of global money printing to sustain easy prosperity in developed economies (US especially). The trouble with money printing is that it is channeled and allocated politically through policy decisions and laws rather than through supply/demand forces. "Supply-side" economics was a political allocation of printed money to areas of the economy deemed "important" to the lawmakers and their backers. It favored capital accumulation over income generation. We all know where they spent and where they chose to cut. Tax policy is especially prone to political allocation of money to those favored by the prevailing regime. 

In consequence, when the economy becomes awash in boatloads of artificial money that never derived from any wealth creation whatsoever, you get a the expected mega-bubble bursting and a subsequent zombie economy. While some sectors will deflate for decades, others will inflate. Look at the evidence that I've been pounding home here for months: incomes are deflating! As they have in real terms for 3 decades. So is employment (look at the civilian employment-population ratio, we're back to early 1980s levels). So is real estate (the brains in Washington are trying to cook up new schemes every week to deal with the massive deleveraging). So are anticipated retirement funds for individuals as lawmakers begin the process of soft defaulting on entitlement programs (John Boehner wants the retirement age put up to 70, as I predicted, and Obama is cutting medicare). But we know from alarm-bell reports this week that food, energy and raw materials are rocketing higher. Forgetting commodity prices, Walmart's basket of food items is up 5% this month, with no rollbacks available. Intermediate goods prices are rising. And so is the cost of financial services such as credit card rates, transaction costs and fees and  insurance. Add to the mix rising healthcare, tuitions, transportation costs,  and taxes at every level. All of which means that consumers are getting crushed. This also presents small businesses with a depressed consumer on the one hand, but increasing cost inputs on the other. 

DUNTHAT's picture

The IMF just published a report that said to solve our fiscal crisis will require a 14% of GDP adjustment.  In other words any combination of revenue or spending cuts amounting to 14%( that's 2 trillion) per year for the next 30+ years.  Anybody care to suggest how this is accomplished?  Current Data:

yr 2010:    692 Billion Discretionary nonDefense

                 705 Billion Defense

              2,057 Billion Entitlments

                 188 Billion Interest

Total       3,643 Billion  Outlays   and Total Revenue of 2,213 Billion

One more fun fact: the defense budget in 2010 dollars in the year 2000 was 377 Billion

Captain Archer's picture

692b(discretionary)+200b(defense)+500b(entitlements) = 1392b. Problems solved.

Gimp's picture

The positive side of all the commodity food prices rising - Americans will look thinner in the next 12 months! Really thin in 24 months, Emaciated in 36  months and probably dead in 48 months.

Full recovery in progress, don't be negative.

Ripped Chunk's picture

The dream dies.

Consumers / Employees see the emperor in his new clothes and has said "enough".

Deflation unavoidable.  Prepare for major fucking around with commodity prices.