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Economy in Brief

Q4 Productivity Revised Down; Bonus Payments Boost Unit Labor Cost
by Carol Stone March 6, 2007

Nonfarm labor productivity was revised to 1.6% in Q4 from 3.0% reported a month ago. The revision was in line with market forecasts, which were based on the most recent revision to GDP. For 2006 as a whole, productivity was also up 1.6%, a downward revision from 2.1% initially estimated.

This productivity report also incorporated revisions to hours worked derived from the annual rebenchmarking of nonfarm payroll data. This year's change added significantly to hours; the total in 2006 now shows 2.2% growth compared with 1.7% shown before. In Q4, though, the revision was slightly downward to 0.9% from 1.2% before. Seasonal adjustment revisions also impacted the data back to 2002.

Compensation per hour last quarter was lifted substantially, reflecting unusually large bonuses paid by companies in Q4. Originally seen at 4.8%, that figure is now at 8.2%. However, Q3 was revised downward to just 0.6% from 3.1%, so the year as a whole was lowered to 4.8% from 5.3% reported last month.

Unit labor cost growth rose commensurately in Q4 with the upward revision to compensation and the downward shift in productivity. It is now reported at 6.6% from 1.7% before. Forecast expectations had it at about 3.0% but at least some forecasters projected as much as 6.5%, factoring in all of the changes in output and compensation. Interestingly, though, these various changes all offset each other over the course of 2005 and 2006, so that unit labor costs for those years as a whole were unchanged from the initial 2.0% and 3.2% estimates.

Factory sector productivity growth was unchanged in Q4 from the 2.2% gain shown earlier. The yearly figure was pushed up slightly, however, from 3.9% to 4.0%. Compensation in manufacturing had already shown a sizable Q4 increase of 7.3% and it was actually reduced a bit to 7.1%. For the year, it rose 3.8%, compared with 4.1% reported before. Unit labor costs were still firm in Q4, 4.7%, revised from 5.0%. The sharp reduction in Q3 compensation lowered annual unit labor costs in manufacturing to an outright decline of 0.2% from a 0.2% increase reported last month.

Non-farm Business Sector (SAAR) 4Q '06 (Rev) 4Q '06 (Old) 3Q '06 (Rev) Y/Y (Rev) 2006 (Rev) 2005 (Rev) 2004 (Rev)
Output per Hour 1.6% 3.0% -0.5% 1.4% 1.6% 2.1% 2.9%
Compensation per Hour 8.2% 4.8% 0.6% 4.9% 4.8% 4.1% 3.6%
Unit Labor Costs 6.6% 1.7% 1.1% 3.4% 3.2% 2.0% 0.7%
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