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Economy in Brief

1Q U.S. Productivity Improved, Profits' Implication Good
by Tom Moeller May 4, 2006

Non-farm labor productivity growth last quarter improved to 3.2% from the 0.3% decline during the final quarter of 2005. The increase beat Consensus expectations for a 2.8% rise and also represented improvement from the average quarterly growth rates during 2004 (2.7%) and 2005 (2.5%).

Output growth surged to 5.8% (4.1% y/y) from just 1.5% during 4Q. That surge was on the back of only a 2.5% (1.7% y/y) rise in hours worked after a 1.8% increase the prior quarter.

Unit labor cost growth of 2.5% was slower than the 4Q increase but nevertheless represented an acceleration in labor cost pressures from a quarterly average of 1.3% during 2005.

Factory sector productivity grew 4.2% (4.1% y/y), right on the firm 4.3% quarterly pace of last year. Compensation grew just 1.5% (3.0% y/y). Therefore unit labor costs in the factory sector declined for the third of the last four quarters, off 2.6% (-1.1% y/y) during 1Q06.

A Leaner, More Skilled U.S. Manufacturing Workforce from the Federal Reserve Bank of New York is available here.

The implicit price deflator for the nonfarm business sector rose 2.8% (3.1% y/y) after a 3.6% jump during 4Q05.The rise lifted the ratio of prices to unit labor costs to near the highest level since 1997. During the last ten years there has been an 81% correlation between this ratio and corporate profit margins.

In Why Did U.S. Market Hours Boom in the 1990s?, the Federal Reserve Bank of Minneapolis examines the impact of longer hours worked on productivity & profits. The paper can be found here.

Non-farm Business Sector (SAAR) 1Q '06 4Q '05 Y/Y 2005 2004 2003
Output per Hour 3.2% -0.3% 2.4% 2.7% 3.4% 3.9%
Compensation per Hour 5.7% 2.7% 3.8% 5.4% 4.6% 4.0%
Unit Labor Costs 2.5% 3.0% 1.4% 2.5% 1.1% 0.0%
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