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Economy in Brief

U.S. Productivity Fell During 4Q '05
by Tom Moeller February 2, 2006

Non-farm labor productivity fell last quarter after a revised 4.5% increase during 3Q. It was the first decline in output per hour since 1Q '01 and followed an average gain of 3.7% during the prior ten quarters. Consensus expectations had been for a 1.5% increase.

Slower output growth accounted for the drop in productivity. The marked slowdown in output to 0.9% (3.6% y/y) from 4.7% during 3Q was accompanied by an acceleration in hours worked to 1.5% (1.2% y/y) from 0.1%.

Compensation costs rose 2.8% after an upwardly revised 3Q increase. As a result, unit labor costs rose 3.5%, the quickest gain in a year.

Factory sector productivity growth rose a firm 3.9% (4.1% y/y) during 4Q following a 3.7% gain during 3Q. Compensation growth slowed to 1.9% (4.1% y/y) from 3.7% and unit labor costs in the factory sector fell 1.9% (0.0% y/y) as a result.

The implicit price deflator for the nonfarm business sector rose 3.2% (3.1% y/y). Since the increase trailed the rise in costs, the ratio of prices to unit labor costs slipped from the record high of the prior quarter. During the last ten years there has been a 60% correlation between the ratio and the y/y growth in operating corporate profits.

Non-farm Business Sector (SAAR) 4Q '05 3Q '05 Y/Y 2005 2004 2003
Output per Hour -0.6% 4.5% 2.3% 2.7% 3.4% 3.8%
Compensation 2.8% 4.1% 3.3% 5.2% 4.5% 4.0%
Unit Labor Costs 3.5% -0.5% 1.0% 2.4% 1.1% 0.2%
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