Weekly Recap: U.S. Nonfarm Productivity Rebounds

Summary:

• Nonfarm productivity rises sharply printing at 2.5 percent for the previous quarter.
• Worker output falls 3.2 percent.
• Labor costs remain benign indicating no upward pressure on wages.

At the end of last week, economic data out of the world’s largest economy encouraged investors that the recovery was picking up steam. Nonfarm productivity rebounded sharply, beating expectations. However, we saw a sharp slowdown in labor costs. This indicates wage pressures are still flat which could keep the U.S. Federal Reserve (Fed) from raising rates anytime soon.

On Friday, the Labor Department reported that productivity rose sharply at 2.5 percent, annually. This is after it contracted by 4.5 percent for the first quarter of 2014. That was the sharpest pullback since the last quarter of 1981. Productivity, which measures worker output, fell 3.2 percent in the first quarter as well. Forecasts had expected productivity to increase by 1.5 percent for the April to June period. This rebound, seems to be in line, with the recovery we are seeing in the gross domestic product (GDP) for the second quarter.

The GDP contracted 2.1 percent in Q1 but was up annually by four percent. However, the trend in productivity remains sluggish. Compared to the second quarter of 2013, productivity only increased by 1.2 percent. Growth in output was up 5.2 percent this previous quarter after falling off 2.4 percent in Q1. Output was previously reported to have been down a little over a one percent pace.

Workers also put in more hours in the second quarter. However, output rose which lowered labor costs. Unit labor costs, which is the price of labor per output, was up 0.6 percent. This comes after being revised upward 11.8 percent. This is the quickest rise the economy has seen since Q4 of 2012. Unit labor costs rose 5.7 percent in the first quarter after economists expected them to increase by 1.4 percent. Comparing these numbers to the second quarter of 2013, unit labor costs were up just under two percent at 1.9 percent. This indicates wage inflation remains flat. We had seen this increasing by 2.6 percent in Q1.

While these numbers are encouraging, the U.S. economy is far from being out of the woods. Do not expect to see a yearend growth of four percent and do not expect the Fed to begin the process of normalizing monetary policy until wage pressures start showing some acceleration.