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Economy in Brief

U.S. Productivity Stronger Than Expected in 4Q
by Tom Moeller February 7, 2007

Nonfarm labor productivity grew 3.0% last quarter after a downwardly revised 0.1% downtick during 3Q06. The gain was well ahead of Consensus expectations and raised growth of 2.1% for the whole year about even with the 2.3% increase during 2005.

The implications of productivity growth were addressed directly in The Level and Distribution of Economic Well-Being, yesterday's speech by Fed Chairman Ben S. Bernanke and it can be found here.

Compensation per hour last quarter grew an accelerated 4.8% after an upwardly revised 3.1% gain during 3Q. Together, these growth rates pulled compensation growth for the year to 5.3% which was the strongest since a 7.2% increase during 2000.

Unit labor cost growth moderated sharply to 1.7% from an upwardly revised 3.2% during 3Q as a result of the improvement in productivity. The full year gain in unit labor costs of 3.2% was the strongest since a 4.2% increase during 2000. During the last thirty years there has been an 85% correlation between labor cost growth the growth in the GDP chain price deflator, although that correlation has fallen sharply in recent years.

Factory sector productivity growth last quarter decelerated sharply to 2.2% from a little revised 6.3% jump during 3Q. The annual gain in factory sector productivity also fell to a still firm 3.9% from 4.7% in 2005. Factory sector compensation per hour jumped 7.3% after 3.3% growth during 3Q. The annual gain in compensation of 4.1% was down just a bit from 4.6% growth during 2005. Unit labor costs jumped 5.0% last quarter as a result of the surge in compensation. The surge nevertheless left the annual gain at a modest 0.2% after a 0.1% decline during 2005.

The Economic Outlook: Prospects for 2007 from Charles I Plosser, President, Federal Reserve Bank of Philadelphia is available here.

Non-farm Business Sector (SAAR) 4Q '06 3Q '06 Y/Y 2006 2005 2004
Output per Hour 3.0% -0.1% 2.1% 2.1% 2.3% 3.0%
Compensation per Hour 4.8% 3.1% 4.9% 5.3% 4.4% 3.6%
Unit Labor Costs 1.7% 3.2% 2.8% 3.2% 2.0% 0.7%
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