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posted on 09 August 2016

2Q2016 (Preliminary): Headline Productivity Contraction Deepens Whilst Labor Costs Rise

Written by Steven Hansen

A simple summary of the headlines for this release is that the growth of productivity contracted while the labor costs grew (headline quarter-over-quarter analysis). The year-over-year analysis also shows productivity in negative territory, and negative productivity is a usual indicator of a recession.

I personally do not understand why anyone would look at the data in this series as the trends are changed from release to release - and many times significantly between the preliminary and final release..

The market was expecting:

seasonally adjusted quarter-over-quarter at annual rate Consensus Range Consensus Preliminary Actual Final Actual
Nonfarm productivity 0.2 % to 1.0 % +0.5 % -0.5 % --- %
Unit labor costs 1.2 % to 3.3 % +1.8 % +2.0 % --- %

The headlines annualize quarterly results (Econintersect uses year-over-year change in our analysis). If data is analyzed in year-over-year fashion, non-farm business productivity was down 0.4% year-over-year, and unit labor costs were up 2.1 % year-over-year. Bottom line: the year-over-year data is saying that costs are rising faster than productivity.

Although one could argue that productivity improvement must be cost effective, it is not true that all cost improvement are productivity improvements. [read more on this statement] Further, the productivity being measured is "capital productivity" - not "labor productivity". [read more on this statement here]

Even though a decrease in productivity to the BLS could be considered an increase in productivity to an industrial engineer, this methodology does track recessions. [The current levels are within recession territory].

Please note that the following graphs are for a sub-group of the report nonfarm > business.

Seasonally Adjusted Year-over-Year Change in Output of Business Sector

Seasonally Adjusted Year-over-Year Change of Output per Hour for the Business Sector

All this is happening while business sector unit labor costs increased.

Seasonally Adjusted Year-over-Year Rate of Change of Unit Labor Costs

The headlines from the press release:

Nonfarm business sector labor productivity decreased at a 0.5-percent annual rate during the second quarter of 2016, the U.S. Bureau of Labor Statistics reported today, as output increased 1.2 percent and hours worked increased 1.8 percent. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the second quarter of 2015 to the second quarter of 2016, productivity decreased 0.4 percent, the first four-quarter decline in the series since a 0.6-percent decrease in the second quarter of 2013. (See chart 1)

Unit labor costs in the nonfarm business sector increased 2.0 percent in the second quarter of 2016, reflecting a 1.5-percent increase in hourly compensation and a 0.5-percent decline in productivity. Unit labor costs increased 2.1 percent over the last four quarters. (See chart 2 )

Final Chart from 1Q2016

Preliminary Chart from 2Q2016

Caveats Relating to Productivity

Productivity is determined using monetary criteria, and does not recognize outsourced man hours - in other words, if a business cuts half of its workforce by outsourcing a sub-component or sub-service, this would be a 50% productivity improvement.

These productivity measures describe the relationship between real output and the labor time involved in its production. They show the changes from period to period in the amount of goods and services produced per hour. Although these measures relate output to hours at work of all persons engaged in a sector, they do not measure the specific contribution of labor, capital, or any other factor of production. Rather, they reflect the joint effects of many influences, including changes in technology; capital investment; level of output; utilization of capacity, energy, and materials; the organization of production; managerial skill; and the characteristics and effort of the work force.

Econintersect believes a better measure (if you must use monetary tools to tract productivity) would be competitiveness.

Looking at productivity / output long term - output fall below 0% year-over-year change is a good sign that a recession is underway. Another way to look at it - if productivity rate of gain is falling, this could be an indicator a recession is coming.



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