Saturday, 19 of August of 2017

Economics. Explained.  

Category » Productivity

Nonfarm Productivity

August 9, 2017

Nonfarm productivity rose 0.9% in the second quarter after having risen 0.1% in the first quarter.   During the course of the past year productivity has risen 1.2%.  The 0.9% increase in the second quarter consists of a 3.3% increase in output and a 2.4% increase in hours worked.

Clearly, productivity growth has slowed. For example, from 2000- 2007 (when the recession began) nonfarm productivity averaged 2.7%.  In the past three years it has been even slower at 0.8%.

Some suggest that productivity is not properly capturing productivity gains in the service sector, particularly with respect to the internet.  For example, apps allow people to book airfares, hotels, and cars from their living room and get directions all at the same time.  But such gains do not appear to be captured anywhere in the productivity data.  The problem with that assertion is that manufacturing productivity  — which can be more accurately measured — has experienced a similar slowdown.  From 2000- 2007 (when the recession began) manufacturing productivity averaged 5.0%.  In the last three years it has risen 0.1%.

Another part of the problem could be that retiring baby boomers could be leaving both their jobs and the labor force, and taking some of their knowledge with them which is adversely impacting the growth rate for productivity.

The basic problem however, in our view, is that businesses remain reluctant to invest despite a record stockpile of cash, near record low interest rates, and a booming stock market.  Investment is the primary driving force behind rapid gains in productivity.  Unfortunately, business leaders appear to be bothered by uncertainty about future tax rates (will the corporate tax rate get cut and, if so, what deductions might be disallowed), the inability to repatriate overseas earnings to the United States, the rising cost of health care which firms with more than 50 employees have to provide,  and an avalanche of onerous, confusing, and sometimes conflicting regulations.  After several years in which nonresidential investment has been essentially unchanged, it had a dramatic  surge to a 7.0% pace in the first quarter of this year followed by an additional 5.1% increase in the second quarter.  These back-to-back gains could be Trump-related.

President Trump appears likely to bring about change to all of these concerns.  Trump hopes to lower the corporate tax rate from 35% to 15%.  He will allow firms to bring overseas earnings back to the U.S. at a favorable 10% tax rate.  He still hopes to revamp health care.  And he intends to completely revamp the regulatory environment with the elimination of all unnecessary, overlapping, and confusing regulations.  These major changes in policy should unleash a wave of corporate investment spending, and because the pace of investment spending largely determines the rate of growth in productivity, the economic speed limit should climb gradually from 1.8% today to 2.8% within a couple of years.  If these regulatory changes actually happen they would represent the most significant economic events that  have occurred in years!

Stephen Slifer

NumberNomics

Charleston, SC


Unit Labor Costs

August 9, 2017

Unit labor costs might be a term that is not familiar to you.  Unit labor costs represent the increase in compensation adjusted for the gains in productivity.  You might think that if labor costs are rising that would put upward pressure on inflation.    It does not matter so much what wages are doing, but what wages adjusted for the change in productivity is doing.  Think of it this way.  If I pay you 3% more money, on the surface you might think that my costs as a businessman have just gone up by 3%.  That is not quite true.  What if you are 3% more productive?  Then I am getting 3% more output from you, so I really do not care.  I am very happy to pay you 3% more money.  In this case, unit labor costs, or labor costs adjusted for the gain in productivity, are 0%.  To take the example one step farther, if I pay you 3% higher wages but you are no more productive, then unit labor costs are rising by 3% and I am probably going to raise my prices to offset the higher cost of labor.  So, a gain of that magnitude in unit labor costs is quite likely to exert upward pressure on inflation.  So always watch what is happening to unit labor costs and not just wages.

Unit labor costs rose 0.6% in the second quarter after having jumped 5.3%% in the first quarter.  The second quarter increase consists of a 1.5% increase in compensation less a 0.9% increase in productivity.  During the past year unit labor costs have declined 0.2%.  But be careful.  This figure has registered significant changes of plus or minus 5% or so for several quarters.  The trend rate appears to be about 1.5% currently.

Looking ahead into 2017 we expect compensation to increase by 2.8% given the tightness in the labor market.  But we also expect productivity growth to climb by 0.9%.  Hence unit labor costs should increase 1.9% versus a 0.2% decline currently.

Stephen Slifer

NumberNomics

Charleston, SC


Hourly Compensation

August 9, 2017

The Bureau of Labor Statistics indicated that compensation rose 1.5% in the second quarter after having jumped 5.4% in the first quarter.  This means that over the past year hourly compensation has climbed by 1.0% but with a lot of bounciness from quarter to quarter.

But, as noted in the section on unit labor costs, what really matters to an employer is not how much they pay someone, but how much they pay them adjusted for the change in productivity.  If I pay you 3% more money, but you are 3% more productive, I really do not care.  I am getting 3% more output from you.  That increase in labor costs adjusted for the change in productivity is known as “unit labor costs”.  If I pay you 3.0% more money but you are no more productive, then my unit labor costs have risen 3% and I may need to raise prices to compensate for the additional labor cost.  So watch compensation, but focus even more closely on unit labor costs.

Currently, unit labor costs have declined 0.2% in the past year but that figure does bounce around a lot from quarter to quarter.  Going forward, the tightness in the labor market should cause compensation to climb by 2.8% in 2017.  Productivity should climb by 0.9%.  As a result, unit labor costs in 2017 should rise by 1.9%.  That will put a moderate amount of upward pressure on the inflation rate.

Growth in hourly compensation is a good thing, but some of that increase can be offset by inflation.  So what we are also  interested in is real hourly compensation.  In the second quarter real compensation rose 1.9% after having climbed by 2.3% in the first quarter.   The first quarter decline consisted of a 1.5% increase in compensation which was  enhanced by a 0.4% decline in inflation as oil prices fell slightly.  In the past year real compensation has declined 0.9% but that largely reflects a huge 8.1% drop in the fourth quarter of last year.  The trend rate for real hourly compensation seems to be about +1.0%.

Stephen Slifer

NumberNomics

Charleston, SC