Productivity and Costs: Workers Do More For Less In First Quarter

Non-farm business sector labor productivity increased at a seasonally-adjusted annual rate of 0.5 percent during the first quarter of 2013, according to the U.S. Bureau of Labor Statistics. The increase in productivity reflects a 2.1 percent gain in output and a 1.6 percent gain in hours worked.

Wednesday’s report is the second estimate for the first quarter, and reflects a downward revision in productivity from 0.7 percent in the previous estimate. Overall non-farm labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.

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Both output and hours worked were downwardly revised in the second estimate, but output fell more, resulting in the downward revision for total labor productivity. Also concerning about the report are dramatic reductions in the figures for hourly compensation, which in turn reduced unit labor costs. The Bureau of Labor Statistics 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.

Labor Previous and Revised

Source: Data from U.S. Bureau of Labor Statistics

Broadly speaking, productivity is a measure of how efficiently an economy is producing goods and services. The costs associated with production can be used as a leading indicator of inflationary pressure. Increased labor costs can ultimately be passed on to the consumer, as reflected in the consumer price index or the personal consumption expenditures index, and they affect the headline inflation rate.

Conversely, a contraction in unit labor costs, which is what happened in the first quarter, is an indicator of deflationary pressure in the pipeline. At best, Wednesday’s report shows minimal inflationary pressure. At worst, it’s evidence that deflationary pressures are building in the economy.

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It’s important to point out that fourth-quarter real hourly compensation was upwardly revised from an annual rate of 0.4 percent to 7.5 percent, which in turn increased unit labor costs for the quarter.

Labor 4Q

Source: Data from U.S. Bureau of Labor Statistics

Year over year, labor productivity — a function of output (+2.4 percent) and hours worked (+1.5 percent) — increased 0.9 percent. Unit labor costs increased 1.1 percent on the year, while unit non-labor payments increased 2.0 percent.

Overall, the revised data suggests that corporations are still finding ways to get more work out of their current labor force. Relatively low payroll increases of 134,000 over the past three months suggest that many businesses are focusing on driving efficiency rather than hiring more workers.

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Productivity4

Source: Data from Bureau of Labor Statistics

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