Productivity winning streak comes to an end

Dip highlights economic slowdown

Nonfarm productivity typically surges in the early stages of an economic recovery because businesses begin to boost output but are slow to hire new workers until they are convinced that the rebound is for real.  With the exception of confidence in the recovery, productivity did surge last year.

Now that the economic activity has hit a few bumps, output (up 2.6%) has slowed. And given the increase in hours (up 3.6%) worked, preliminary data show that nonfarm productivity in Q2 fell at an annualized rate of 0.9%, ending a five quarter winning streak.

The sting from the decline in productivity was alleviated a bit, as last quarter’s increase of 2.8% was revised upward to 3.9%.

Notably, productivity in the manufacturing sector, which expanded at a fairly healthy clip last quarter, grew 4.5%.

In the meantime, unit labor costs managed a tiny gain of 0.2%, but that doesn’t necessarily translate into wage gains because  hourly compensation slipped by 0.7%.

What does all this mean?

First of all, the dip in productivity is a reflection of the slowdown in economic activity and will probably be met by a continued reluctance among employers to add to payrolls.

Second, the lack of wage gains – labor costs are the biggest input for most businesses – further diminishes any risks on the inflation front.  In fact falling hourly compensation is likely to give more ammunition to the deflation hawks that have been squawking while increasing pressure on the Fed to once again take unconventional measures to stimulate the demand.