Productivity jumped in 2Q because businesses continued to reduce hours (-7.6), but cutbacks in output slowed dramatically (-1.7). Normally, productivity surges during the end of a recession and the early stages of a recovery because businesses are reluctant to add workers as output grows.
With the exception of just a 0.1% dip in 1Q and 3Q of 2008, productivity remained positive despite the severity of the recession, highlighting how quickly companies shed workers in the face of falling demand.
The drop in unit labor costs is the direct result of the sharp gains in productivity, which could ease some of the rising cost pressures from increases in commodity prices and gasoline.
Core inflation fell through much of the 1990s amid rising productivity and flat commodity prices. Following the mild slump of 2001, inflation did not bottom until late 2003.
The core CPI has been stuck near the high end of the Fed’s implied target of 1-2%. With expectations of a recovery later in the year and a bounce in commodity prices, worries that inflation could fall to undesirably low levels was not present in the last FOMC statement that accompanied the interest rate decision in June.
Outsized gains in productivity and excess capacity around the world, however, may put downward pressure on inflation going forward, offsetting some of the impact of rising commodity prices and the still-accommodative monetary policy.
A more conventional viewpoint is available at Examiner.com.
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