Wages are up and output per hour is down. Is this the magic mix for what ails the economy?
Productivity declined 0.6%, exactly in-line with the Bloomberg Econoday consensus.
Productivity remains a key weakness of the economy and is especially evident during the low output of the first quarter. The second estimate of first-quarter nonfarm productivity came in at a quarter-to-quarter annualized decline of 0.6 percent. Output during the quarter rose 0.9 percent but the increase was outmatched by a greater increase for hours worked, up 1.5 percent. Not only did hours exceed output, compensation rose at the same time, up 3.9 percent to lift unit labor costs by 4.5 percent.
Trends in the data show less weakness with year-on-year productivity up 0.7 percent and unit labor costs up 3.0 percent. Here output, up a year-on-year 2.3 percent, exceeds hours worked, up 1.6 percent. Compensation is up a year-on-year 3.7 percent with unit labor costs up 3.0 percent.
American workers did not perform well in the first quarter, reflecting to a significant decline lack of business investment in new equipment.
Nonfarm Productivity vs. Costs
Curiously, Bloomberg also states “Nonfarm productivity growth has remained healthy during this expansion, but it has prevented employment from growing very fast and this hurt income growth to some extent. Unit labor costs tend to fall when productivity growth accelerates and then rises as productivity growth abates.”
The above chart does not look like “healthy” gains in productivity to me.
Unexpectedly Strong Wage Growth
The Wall Street Journal chimes in with U.S. Productivity Fell 0.6% in First Quarter.
Nonfarm productivity, reflecting the amount of goods and services employees produce per hour worked, fell at a yearly rate of 0.6% in the first quarter, the Labor Department said Tuesday. That replaced the agency’s initial estimate of a 1% decline.
The bigger story, however, was an unexpectedly strong increase in workers’ hourly compensation. It grew 3.9% in the first three months of the year after rising at a similar pace in the fourth quarter. Compensation grew 3.7% in the first quarter compared to a year earlier—the strongest annual gain in two years.
Stronger wage growth has been one of the big missing ingredients of the nearly seven-year-old economic expansion, but a slew of measures suggest workers’ pay is now picking up. The Federal Reserve has been looking for stronger wage growth for a sign that the labor market is nearing full employment and that the economy is strong enough to withstand an increase in short-term interest rates.
”Wages have finally begun to move higher in earnest,” economist Stephen Stanley of Amherst Pierpont Securities said in a note to clients. “The anecdotal and survey evidence has been pointing to rising wages for a while, but the data were slow to fall into line. Now they have.”
Productivity has slowed since the recession. Productivity grew 0.7% in the first three months of this year compared to the same period a year earlier. That is down sharply from the post-World War II average growth of 2.2% a year. Weak productivity is believed be a big reason Americans’ wages have grown sluggishly in recent years.
Productivity Summation
- Bloomberg: Productivity remains a key weakness of the economy.
- Bloomberg: Nonfarm productivity growth has remained healthy during this expansion.
- WSJ: Productivity has slowed since the recession. Weak productivity is believed be a big reason Americans’ wages have grown sluggishly in recent years.
What’s Going On?
I suggest Bloomberg and the WSJ have overlooked the single most likely reason wages are going up: The “battle for $15 an hour” and numerous minimum wage hikes by various states.
Let’s hone in on manufacturing specifically.
Manufacturing Shipments vs. Employees
Manufacturing Productivity
Automation has slowed. When it picks up again, it will likely be at the expense of more manufacturing jobs.
Meanwhile, it’s a huge mistake to read too much into rising wages overall. It’s not a tight labor market that’s driving wages, it’s minimum wage mandates.
Mike “Mish” Shedlock
Again, things change so much in these government numbers, that it is difficult to believe a thing they say. They are pushing these insane minimum wages, yet American is more broke then ever. We sell retail and are seeing tighter wallets everywhere. Retail stores are closing at a record rate and our distributors are discounting to move merchandise. If wages truly are rising, then they money is going to higher car payments and health insurance payments because it’s not being used to purchase anything else.
If there was really a tight labor market, then why is 1/3rd of the population still unemployed? More smoke and mirrors coming from the powers in charge to keep the status quo alive.
“If there was really a tight labor market,”
Back around January or so Trump had the quote (imo) of the campaign trail. Along the lines of
‘would I be having these (large) crowds if UE really only 5%?’
“They pretend to pay us and we pretend to work.”
“Productivity Declines 0.6%, Wages Rise 4.5%; What’s Going On?”
BLS didn’t say wages grew 4.5%. Unit labor costs grew 4.5% … which includes:
“Labor Compensation
The measure includes accrued wages and salaries, supplements, employer
contributions to employee benefit plans, and taxes.”
http://www.bls.gov/news.release/prod2.tn.htm
I would bet that MUCH of the increase was employers kicking in for 2016 health care premium increases … courtesy of ACA.
Consequently, employees likely saw only small gain (if any) to paycheck.
Yes – That should say labor costs
Thanks
Will correct
Real world inflation is out of control. People are getting desperate. Bankers are printing a future banana republic.
Wages in Venezuela are up too. The bankers paradise with 500% inflation.
Great blog here Mish, cool, very good, bravo!
It appears to me that raising the bottom (minimum wage) did nothing for the continued downward compression of upper/middle class wages.
As an engineer in manufacturing for 30 years, BSEE MSEE, I can tell you that engineering wages are still heading down for hires (previously laid-off engineers lose 20-50% if lucky enough to find a job) and stagnant for present employees. No promotions, no pay increases, no stock bonuses or grants, no incentives. And the selection process appears to heavily favor low-experience minorities and H1B visa contractors from India, Iran, Iraq, China.
Many of us now make the same pay as people without college degrees that work as managers at Prime Time Lending collections or Wells Fargo credit card fraud detection. And those two examples have a very easy time finding jobs, unlike engineers.
But all the data I see show the top salaries for college degrees completely dominated by engineering fields.
Quite a few engineers and hard science majors go over to the ‘dark side’ and become financiers. At the top universities, it’s quite common for the best technical undergraduates to go to Wall Street and make as much money in one year as their fellow grads make in five years as engineers or scientists.
Destroying America pays much better than building (or rebuilding) America.
When you average one $250,000/yr Wall Street quant guy and nine $50,000/yr engineers together, the average starting salary is $700,000 / 10 =$70,000. Yet, 90% of those ten tech guys that year make “below-average” wages.
Wages= Lagging Indicator in “Recoveries.” You know, the engineered kind?
In the new normal, only printing press productivity matters. (.gov. Spending)
If the quantity of new dollars parallels wages up, the Fed can achieve it’s dream of 7-9% nominal returns again, and all will be well for another 8 year presidential cycle. Likely the last one before total implosion, although the Soviets pulled off their faux utopia for 70+ years by simply exerting brute force. And the Chinese are just entering that stage where voluntary is reverting back to mandatory.
HRC will reinvent The New Deal after January. CAT, DE, and the Defense sector are on my shopping list. Also, any of the Silicon Valley tech monopolies are good bets for when the “reimbursement” for their help in the campaign rolls around.
A new WPA type program is also likely. It will be centered on clean industries, not so much pic and shovel endeavor. Today’s “Poor, disadvantaged, disenfranchised” type voters,,,,sorry,,,,”victims” don’t like getting dirty.
I’m looking for prospects there. Maybe areas benefiting from Nationalized Health Care and Unionized Community Organizer programs. Building, related to HUD subsidized and Section 8 programs, all at prevailing wages. Glass and steel high rises dedicated to education and administrative empires. Parks, high speed trains to nowhere,,,,that sort of thing.
Trump, you say? Furgettaboutit,,,,he’s a great entertainer, but he is just not connected to the corrupt elite polity that prevails in this country today. In the rest of the world, for that matter.
We may not like it, but if wishes were fishes, we would all swim the seas.
All said, it would be wise to always keep enough dry powder stashed to buy fare out of dodge, if needed.
As an aside, my little unofficial (non corporate sponsored) personal poll in Cali has Bernie favored by 2 to 1, so HRC will most certainly win the delegates ;-).
“A new WPA type program is also likely.”
Really?
The Republicans will likely still control Congress … and they spent years deriding ARRA as a waste.
Not saying it couldn’t happen, but only when the country deep in the throes of a recession (ie: stock market waayyyy down to provide political cover as 401kers scream Do Something)
As it stands (tax revenue hold steady / no new spending initiatives … and if US enters a recession they will plunge) current deficit projected to be > $500 billion … and steadily getting worse. Any sort of New Deal and we’re back in the $trillion deficit(s) camp.
WITH MANUFACTURING LEAVING THE USA, since NAFTA and the Chinese Trade Agreement; what do these numbers really mean? Simple common sense tells me that this DATA is becoming less and less important and harder and header to make sense of. At least for me. THIS is why I have gone back to Trading basic commodities, where I started 4+ decades ago…. and the less impact, in the big picture, the better! Small markets, the more basic and classic demand and supply the better! Sure, everything is connected, but so much is controlled that the BIG PICTURE fundamentals are harder and harder to see and fully understand. Particularly the TIMING THEREOF! Now, Trading the smaller markets, I’m starting to love trading again, like I did until about 6 years ago.
Mish – didn’t they move things like hamburger flippers into the manufacturing category. Would this have impacted the productivity numbers?
I am wondering if the big gains in manufacturing productivity have been made.
But shoes are coming up for sure.
A couple of brief comments:
1) Productivity (down); Stock buybacks (up) – Stock buybacks drastically reduce business investment (CapEx) in productive ventures, including employees and new equipment. Stock prices benefit corp. insiders + 1%, but do nothing to grow the Co. Another example of cheap money enabling a huge misallocation of capital.
2) Labor costs (up); Min. wage (up) – Socialists micromanaging the economy again. Robots on the way. Add ACA/Obamacare and you have a small business disaster. Misallocation of capital due to gov’t. regs. Not to mention the disproportionate largess of the public sector sucking the life out of the private sector.
This isn’t rocket science. The economy will not improve until we return to something approaching free markets, but socialists want the opposite. This has worked out well throughout history has it not? (/sarc.) Just look at: former USSR, Cuba, Venezuela, Puerto Rico (rich port – ha!), CA, IL, NY, etc. Now add USSA to the list.
The solutions are obvious, but not enough opportunities for unrestrained power, graft, and corruption.
Well, wages have been lagging behind productivity for decades:
https://systemicdisorder.files.wordpress.com/2014/09/productivity-chart-1948-2013.png?w=640&h=412
Let the LAYOFFS commence!
“American workers did not perform well in the first quarter, reflecting to a significant decline lack of business investment in new equipment.”
Businesses have been heavily investing in stock buybacks, the last several years. The last thing they want to do is invest in new equipment.
I don’t believe minimum wages are the driving issue here. Increased minimum wages have only been adopted in a few locales around the country. Down here in the deep South, min wages have flat-lined for years.
I believe what we are seeing is an increasing bifurcation in wages in the population where they are down/flat for lower-skilled positions but growing well for higher-skilled positions as well as for long-time insiders.
Many corporations have slimmed down so much that they are very reliant on key skilled staffers who have so much corporate knowledge that it is important that they are retained.
Increasing wages and reducing productivity are great signals to get business investment moving again. That’s the driver for a real growing economy.
FYI
You are not the only one who noticed.
http://www.dcclothesline.com/2016/06/07/something-big-that-always-happens-right-before-the-official-start-of-a-recession-has-just-happened/#more-60868
Something Big That Always Happens Right Before The Official Start Of A Recession Has Just Happened – In particular, the number of temporary jobs in the United States has started to decline significantly after peaking last December. Why this is so important is because the number of temporary jobs started to decline precipitously right before the last two recessions as well.
If you are a Wall Street “analyst”, and you believe that a 30% Obamacare premium increase will magically somehow fold into 2% CPI inflation…
…then you are not worth the OLD minimum wage, never mind $15/hr.
Let’s see, I read about the Panama Papers that all the rich people are hiding their money to avoid paying taxes but middle-class and poor people should give a shit about “productivity”. The old greater fool theory, I guess.
Mish,
You frequently talk about driverless cars and robots. Wouldn’t those increase productivity? If we are not seeing productivity increase, then are we measuring it incorrectly (like GPD & CPI) or is ther more press about what they want to implement then what they actually are implementing? Then we are just seeing a lot of hype.
This is not a smart ass question. I am just curious why there would be a disconnect. I would think productivity would be increasing at an increasing rate.
Productivity will get a huge boost once the driverless model takes hold. Curiously, I am not sure the Fed will like it.
Mish
If wages are rising, for whatever reason, while sales and profitability are declining or flat, it stands to reason that COST is the factor reducing productivity…