Janet Yellen and the Fed are concerned about Labor Productivity. It’s down for the third consecutive quarter, a rarity.
Nonfarm business sector labor productivity decreased at a 0.6-percent annual rate during the second quarter of 2016, the U.S. Bureau of Labor Statistics reported today, as output increased 1.1 percent and hours worked increased 1.7 percent. 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.
In the second quarter of 2016, nonfarm business productivity was revised down slightly to a decline of 0.6 percent. Output was revised down slightly to an increase of 1.1 percent, and hours were revised down slightly to an increase of 1.7 percent. Unit labor costs increased 4.3 percent rather than increasing 2.0 percent as reported August 9, due mainly to a 2.2-percentage point upward revision to hourly compensation, in addition to the slight downward revision to productivity.
In the second quarter of 2016, manufacturing sector productivity was revised down to a decline of 0.4 percent from a previously-reported decline of 0.2 percent. Unit labor costs increased 6.7 percent, higher than the preliminary
estimate of 3.1 percent. Durable and nondurable goods manufacturing unit labor costs were also revised up, to increases of 3.0 percent and 13.0 percent, respectively. After revision, nondurable goods unit labor costs had its largest gain in the series since a 13.2-percent gain in the fourth quarter of 2008.
Unit Labor Costs Soar
On August 9, the BLS reported labor costs increased 2.0%. In today’s report we see unit labor costs rose 4.3%, more than double the initial report.
Robust Hiring About To End?
It takes an increasing amount of hours to produce less output. Economists believe businesses are not investing in equipment. In a few years productivity will soar due to driverless vehicles. I rather doubt the Fed will like the result.
Meanwhile, we have an overabundance of stores of all kinds that have to be stocked and staffed. Stores are effectively cannibalizing their own sales.
Rapid store expansion only made sense to expand because of cheap rates and low wages. Now minimum wages and Obamacare costs are both expanding rapidly. Robust job hiring will come to an end.
Mike “Mish” Shedlock
Let the layoffs begin – unit cost always goes up when you are in a recession, until companies reset the labour staff.
Productivity dropping is normal during this stage of the demographic cycle. The baby boom of 1991 is beginning to take a larger percentage of the available jobs. At 25 they aren’t the most efficient workers. Once they get married and have kids, they will become a lot more concerned about holding onto their job and advancing their careers, and then productivity will rise again. The same thing happened in the 1970’s.
I should add that falling productivity in the 70’s was one of the causes of inflation in that time period. Will falling productivity trigger inflation today? I don’t know.
Deflation coming down the pike.
Another explanation–hiring for “diversity” is putting a lot of incompetent people on the payroll of many companies.
Does anyone know the breakdown of the unit labor costs? It is benefits (healthcare costs) or wage increases? I doubt that it’s primarily wage increases but could be wrong.
never mind. The article mentions the 2.2% hour wage revision.
Good news for equity prices!
Can you give us a timeframe?
The strength of the labor market despite massive immigration and sluggish growth is very puzzling. And before somebody blames rigged numbers, A) the numbers were always rigged and B) private trackers like TrimTabs also have robust job growth.
I know I see “We’re Hiring” signs everywhere. Don’t get it.
Really?
I track withheld and employment tax collections via Treasury Daily Statement. For June, July, and August collections are essentially FLAT year over year.
I know location is everything. Here in Central Florida job growth is booming. And in the software sector, labor prices are through the roof. Most jobs are low paying tourist and Disney stuff. But folks are definitely getting pay raises. We’re going across the board 3.5% to stay competitive with the local market. Higher for senior engineers.
On a side note, the SpaceX rocket explosion this morning was much worse than reported. The concussion cracked a window in my house and I live almost 9 miles away. My wife said the house shook so bad she thought it was an earthquake.
One common element to all our problems with the economy…. gubberment.
Kinda like this little trick:
TEAM OBAMA’S BANK SETTLEMENT CASH GRAB IS UNCONSTITUTIONAL
“The Justice Department has negotiated “bank settlement agreements” whereby banks make restitution to the government for the damage they allegedly did in connection with the creation and sale of residential mortgage-backed securities in the subprime-mortgage crisis”
“Justice allows banks to meet some of their settlement obligations by directing “donations” to various nongovernmental advocacy organizations that serve Democratic constituencies and objectives — organizations that were neither parties to the case nor victims of the banks’ behaviors”.
http://nypost.com/2016/08/31/team-obamas-bank-settlement-cash-grab-is-unconstitutional/
An excellent article, Greg. Pretty amazing. Obama is indeed using the banks via DOJ as a slush fund. Probably he knows his law, and there is no one with legal standing who will challenge this. When you are the Top Law Enforcement Officer and beyond easy challenge, the Law is whatever you want it to be. Corruption Rules. Probably lots of “party machines” being built in this way. In exchange for these payoffs and to ensure more in the future, perhaps these groups will hack a few Diebold machines in Ohio and elsewhere.
No doubt the same banks, being even more under-capitalized as a result, will have to raise fees and rates on consumers and businesses and ask for bail-ins of depositors in the future. Obama already has regulators stationed in all the banks, and Congress via Maxine Waters has them all saddled with affirmative action quotas. All part of the socialization or nationalization process. I suspect all these weakened banks, when fully drained of funds by USA.gov fines, will collapse all the sooner and to be merged into one big super-bank. If all transactions by law must go through the super-bank in digital form (assured by war on cash)…
Wow, the O at it again. Fannie and Freddie led the way with MBS. The government and Senate finance committee pushed the crap loans hard. Clinton sued the major banks into playing the entire game.
4.3% ?
a nightmare
A couple of guesses:
1. It is much, much harder to get productivity gains in service organizations than it is in manufacturing. Service is about people. As the U.S. has outsourced/mechanized much of its manufacturing, productivity gains can’t be like the old days.
2. Businesses have not been investing in capacity. So I am betting they’re paying more for overtime instead of hiring more workers. It is well documented that humans begin to rapidly lose their productivity after 6 hours of work. You pay 50% more on labor for at best linear growth in output.
Agree. Also trailing three decades productivity largely computer revolution driven. Huge gains in clerical services driven by PC. Manufacturing automation same. These gains are largely played out now. Next big thing may be playing with our ties while watching central banks overpay for our assets. Not highly productive activity.
Kunstler’s Long Emergency.
It just keeps getting longer.
I’d like to hear more about the reasoning behind this statement:
“It takes an increasing amount of hours to produce less output. Economists believe businesses are not investing in equipment. In a few years productivity will soar due to driverless vehicles. I rather doubt the Fed will like the result.”
I think this deserves to be developed further. I’d also be interested in hearing your thoughts on how you think driverless vehicles and other forms of automation will affect how productivity is measured. I believe you’ve made some convincing arguments elsewhere about automation on balance being a deflationary force. How might that factor into future changes in metrics?
Productivity is what it is substantially because printing has misallocated capital, thus removing it from the system. The nation has eaten its seed corn. Keynesian pyramids may seem nice to ivory tower model builders, but in the real world they gradually subtract capital from the economy.
For capitalism to work efficiently, the free market must set prices. As it is now, business leaders can’t figure out what customers want, because supply/demand information has been removed from price by printing. The blue chips have mostly stopped constructing new factories. Millions of empty McMansion type Keynesian pyramids were constructed across different sectors of the economy due to prices going wild, and business leaders no longer trust price as a indication of what customers want in the long run.
With wanton printing, there is no longer free market capitalism, but rather de facto inefficient bank central planning of the economy. Some bankers love to trick industry into producing Keynesian pyramids by manipulating prices, but those are not a sensible long run business investment. Business is starting to realize they are being tricked, and have retreated to borrowing to repurchase shares.