Productivity and Unit Labor Costs Show Deteriorating Trends

Productivity rebounded in the second quarter to +1.8% QoQ annualized (consensus 2%) from a revised lower +.7% in the first quarter, as output grew faster (+4.2%) than hours worked (+2.3%). This mini surge is not expected to be repeated again soon as GDP grew at its fastest pace in a year in the second quarter (+3.4% vs +.6% in the 1st qtr). Over the past year, output has grown 2% YoY while employee hours worked grew +1.3% YoY. In comparison, in the second quarter of 2006, output over the prior year had increased +3.6% YoY while hours worked grew +2.4 YoY. Non-financial productivity, which is reported with a one quarter lag, grew +.2% in the first quarter.

Labor costs have risen much more than expected so far this year. The first quarter's annualized growth rate was +3%, a significantly higher revision from the originally reported +1.8%, and the second quarter growth rate came in at +2.1% QoQ annualized (consensus +1.8%). Over the last 12 months, unit labor costs have risen +4.5% YoY, which is the largest annual gain since the tech boom in 2000, and above headline CPI inflation at +2.7% YoY. Compensation grew at +3.9% QoQ annualized in the second quarter, but when adjusted for inflation, real compensation fell -2%. Over the last year, compensation has risen +5.2% YoY, with real compensation rising +2.4% YoY.

Revisions for the past few years revised down productivity gains and boosted labor costs. These revisions, and today's data, indicate that the productivity miracle that helped reduce inflation over the past decade may have petered out. Slowing productivity and accelerating costs are not positive for future corporate earning growth, or the non-inflationary growth potential of the US economy. This data is not likely to cause the Fed to want to rush to lower interest rates, due to the inflationary implications.


Productivity rebounded in the second quarter to +1.8% QoQ annualized (consensus 2%) from a revised lower +.7% in the first quarter, as output grew faster (+4.2%) than hours worked (+2.3%). This mini surge is not expected to be repeated again soon as GDP grew at its fastest pace in a year in the second quarter (+3.4% vs +.6% in the 1st qtr). Over the past year, output has grown 2% YoY while employee hours worked grew +1.3% YoY. In comparison, in the second quarter of 2006, output over the prior year had increased +3.6% YoY while hours worked grew +2.4 YoY. Non-financial productivity, which is reported with a one quarter lag, grew +.2% in the first quarter.

Labor costs have risen much more than expected so far this year. The first quarter's annualized growth rate was +3%, a significantly higher revision from the originally reported +1.8%, and the second quarter growth rate came in at +2.1% QoQ annualized (consensus +1.8%). Over the last 12 months, unit labor costs have risen +4.5% YoY, which is the largest annual gain since the tech boom in 2000, and above headline CPI inflation at +2.7% YoY. Compensation grew at +3.9% QoQ annualized in the second quarter, but when adjusted for inflation, real compensation fell -2%. Over the last year, compensation has risen +5.2% YoY, with real compensation rising +2.4% YoY.

Revisions for the past few years revised down productivity gains and boosted labor costs. These revisions, and today's data, indicate that the productivity miracle that helped reduce inflation over the past decade may have petered out. Slowing productivity and accelerating costs are not positive for future corporate earning growth, or the non-inflationary growth potential of the US economy. This data is not likely to cause the Fed to want to rush to lower interest rates, due to the inflationary implications.

Productivity rebounded in the second quarter to +1.8% QoQ annualized (consensus 2%) from a revised lower +.7% in the first quarter, as output grew faster (+4.2%) than hours worked (+2.3%). This mini surge is not expected to be repeated again soon as GDP grew at its fastest pace in a year in the second quarter (+3.4% vs +.6% in the 1st qtr). Over the past year, output has grown 2% YoY while employee hours worked grew +1.3% YoY. In comparison, in the second quarter of 2006, output over the prior year had increased +3.6% YoY while hours worked grew +2.4 YoY. Non-financial productivity, which is reported with a one quarter lag, grew +.2% in the first quarter.

Labor costs have risen much more than expected so far this year. The first quarter's annualized growth rate was +3%, a significantly higher revision from the originally reported +1.8%, and the second quarter growth rate came in at +2.1% QoQ annualized (consensus +1.8%). Over the last 12 months, unit labor costs have risen +4.5% YoY, which is the largest annual gain since the tech boom in 2000, and above headline CPI inflation at +2.7% YoY. Compensation grew at +3.9% QoQ annualized in the second quarter, but when adjusted for inflation, real compensation fell -2%. Over the last year, compensation has risen +5.2% YoY, with real compensation rising +2.4% YoY.

Revisions for the past few years revised down productivity gains and boosted labor costs. These revisions, and today's data, indicate that the productivity miracle that helped reduce inflation over the past decade may have petered out. Slowing productivity and accelerating costs are not positive for future corporate earning growth, or the non-inflationary growth potential of the US economy. This data is not likely to cause the Fed to want to rush to lower interest rates, due to the inflationary implications.


Productivity rebounded in the second quarter to +1.8% QoQ annualized (consensus 2%) from a revised lower +.7% in the first quarter, as output grew faster (+4.2%) than hours worked (+2.3%). This mini surge is not expected to be repeated again soon as GDP grew at its fastest pace in a year in the second quarter (+3.4% vs +.6% in the 1st qtr). Over the past year, output has grown 2% YoY while employee hours worked grew +1.3% YoY. In comparison, in the second quarter of 2006, output over the prior year had increased +3.6% YoY while hours worked grew +2.4 YoY. Non-financial productivity, which is reported with a one quarter lag, grew +.2% in the first quarter.

Labor costs have risen much more than expected so far this year. The first quarter's annualized growth rate was +3%, a significantly higher revision from the originally reported +1.8%, and the second quarter growth rate came in at +2.1% QoQ annualized (consensus +1.8%). Over the last 12 months, unit labor costs have risen +4.5% YoY, which is the largest annual gain since the tech boom in 2000, and above headline CPI inflation at +2.7% YoY. Compensation grew at +3.9% QoQ annualized in the second quarter, but when adjusted for inflation, real compensation fell -2%. Over the last year, compensation has risen +5.2% YoY, with real compensation rising +2.4% YoY.

Revisions for the past few years revised down productivity gains and boosted labor costs. These revisions, and today's data, indicate that the productivity miracle that helped reduce inflation over the past decade may have petered out. Slowing productivity and accelerating costs are not positive for future corporate earning growth, or the non-inflationary growth potential of the US economy. This data is not likely to cause the Fed to want to rush to lower interest rates, due to the inflationary implications.