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Economy in Brief

2Q U.S. Productivity Revised Up, Compensation Surged
by Tom Moeller September 6, 2006

Non-farm labor productivity growth last quarter was revised upward to 1.6%, about as expected. The gain remained, however, quite a bit slower than the 2.7% average quarterly growth during the prior four quarters.

Compensation growth also was revised up, but to a much greater degree. The revised 6.6% 2Q increase compared to a preliminary report of a 5.4% gain and the revised 13.7% surge during 1Q was more than double the initial report.

Unit labor costs, therefore, surged. The revised 2Q increase of 4.9% was up from the initial report of a 4.2% gain and the 9.0% increase now estimated for 1Q compares to a 2.5% increase reported last month.

Factory sector productivity growth was revised down slightly to 2.6% (3.7% y/y) after a 3.7% 1Q increase. Factory sector compensation per hour, however, was revised up to a 4.0% (6.1% y/y) gain from 1.7%.

The previous sense that unit labor costs in the factory sector were under control, therefore, was revised away. Costs rose 1.3% (2.4% y/y) after a 9.3% 1Q rise that was revised from 1.4%.

In the nonfinancial corporate sector 2Q productivity, reported for the first time, grew 2.2% (4.8% y/y) after an 11.1% surge during 1Q. Unit labor costs grew 4.2% (2.6% y/y), the most since 3Q '05.

Prices in the nonfinancial corporate sector rose and the implicit price deflator increased 3.4% (3.3% y/y). As a result the ratio of prices to unit labor costs fell. Corporate profit growth of 3.2% last quarter was down from 12.6% during 1Q and was the slowest in nearly a year. During the last ten years there has been a 46% correlation between the ratio and the y/y change in corporate profits.

Do Inflation Targeters Outperform Non-targeters? from the Federal Reserve Bank of St. Louis is available here.

Non-farm Business Sector (SAAR) 2Q' 06 (Revised) 1Q '06 Y/Y 2005 2004 2003
Output per Hour 1.6% 4.3% 2.5% 2.3% 3.0% 3.7%
Compensation per Hour 6.6% 13.7% 7.7% 4.4% 3.6% 4.0%
Unit Labor Costs 4.9% 9.0% 5.0% 2.0% 0.7% 0.3%
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