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Productivity and Labor Costs


Release Date: five weeks after end of each quarter
(For Productivity and Labor Report)

The Bureau of Labor Statistics publishes its report on Productivity and Labor Costs eight times per year: five weeks after the end of each quarter and a revision three weeks after each of these first reports.

To quote the most recent BLS report: “‘Labor productivity,’ or output per hour, is calculated by dividing an index of real output [especially the GDP report] by an index of hours worked of all persons.”

Most of the data used to generate these statistics come from the BLS’s CPI data and from the Commerce Department’s GDP report. “Unit Labor Costs” are the totality of wages paid to employees, as well as employee benefits and employee related taxes. 

This report is the result of some intense calculations on the part of the BLS, which accounts for the value many in the trade put on it as well as for the time lag between the end of the quarter and its publication more than a month later.

Ordinarily, these numbers are not big, abrupt market-movers, in part because they are generated from data that was made public more than a month earlier. However, they are very important to the Fed. Chairpersons Yellen, Bernanke, and Greenspan have all focused repeatedly on “productivity growth” and “unit labor costs” because history has shown that inflation tends to first rear its head in wage increases, especially wage increases that are not accompanied by commensurate productivity growth.

In May of 2015, Ms. Yellen was quoted as saying, “The most important factor determining living standards is productivity growth.” (Wall Street Journal, 6/4/15) With this growth many great things are possible, including wage increases and stepped up GDP, all without inflation. But without this increased productivity, our fate frequently includes higher inflation, higher interest rates, and lower securities valuations.

As is often the case, market observers usually first encounter this report in an abbreviated format, as they did on June 4, 2015:   

Productivity and Labor Costs

Prior

Consensus

Consensus Range

Actual

Nonfarm productivity - Q/Q change - SAAR

-1.9 %

-2.9 %

-3.3 % to -2.2 %

-3.1 %

Unit labor costs - Q/Q change - SAAR

5.0 %

6.0 %

4.4 % to 6.5 %

6.7 %


Although this report has shown some wild fluctuations in the past, this report was particularly surprising to many, especially those who own businesses, because their personal experiences were at odds with such robustly accelerating labor costs. (Year-over-year, incidentally, productivity data was less volatile, showing a 0.3% gain.)

One possible reason for such divergent perceptions might be that GDP data for Q1, 2015 remain questionable. For much of May and June, 2015, the Bureau of Economic Analysis at the Chamber of Commerce has been checking into the possibility that the algorithm that it uses to calculate seasonality may be faulty, among other possible problems.

If this turns out to be the case, then the entire Productivity and Labor Costs report is called into question because so many of its calculations originate with data from this GDP report.

There are some dire aspects of recent productivity reports that no amount of statistical smoothing or revamping is likely to make disappear. According to J.P. Morgan, the U.S. has averaged just 0.6% annualized productivity for 2010-2015.

This is the worst such string since the early 1980s, and the worst ever outside of a recession. Given the importance of productivity for our economy, this could perhaps go a long way toward explaining why there has been good jobs data, but still disappointing growth in wages and the economy.

The report renders very detailed data about all non-government, non-charitable sectors of American business, which it breaks down into private business, “durable manufacturing,” “non-durable manufacturing,” and “non-financial corporate.”

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