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Economy in Brief

U.S. Productivity Missed 2Q Estimate, Cost Increase Fastest Since 2000
by Tom Moeller August 7, 2007

Growth in non-farm labor productivity of 1.8% last quarter fell a bit short of Consensus forecasts for a 2.1% increase but it was the fastest since a 2.5% rise during 1Q06. The gain was up from the revised 0.7% increase during the first quarter but the average of the two at 1.2% barely exceeds the 1.0% gain last year and falls well short of 2.7% growth during 2004.

What Happened to the Gains From Strong Productivity Growth? from the Federal Reserve Bank of Kansas City can be found here.

Output growth of 4.2% (2.0% y/y) also was the best since 1Q06 and was an acceleration from the 1.5% average of the prior four quarters.

Compensation growth held at an elevated 3.9% (5.2% y/y), the fastest y/y growth since 2000.

As a result, unit labor costs rose 2.1% during 2Q07 which was down from a 3.0% rise the prior quarter, but the 4.5 gain from the prior year also was the fastest since 2000.

The implicit price deflator rose 2.4% (2.0% y/y) and the increase lifted the ratio of prices to unit labor costs just slightly. It still well below the high during last year. During the last ten years there has been a 59% correlation between the ratio and the y/y growth in corporate profits.

Factory sector productivity grew 1.6% (2.9% y/y, about the same as during the prior quarter. Manufacturing compensation grew 2.8% (6.2% y/y) which was the fastest y/y gain since 2005. And though the 1.2% quarterly gain in unit labor costs was down from 5.0% during 1Q, the y/y gain of 3.2% in factory sector unit labor costs was the fastest since 2000.

Non-farm Business Sector (SAAR) 2Q '07 1Q '07 Y/Y 2006 2005 2004
Output per Hour 1.8% 0.7% 0.6% 1.0% 1.9% 2.7%
Compensation 3.9% 3.7% 5.2% 3.9% 4.0% 3.6%
Unit Labor Costs 2.1% 3.0% 4.5% 2.9% 2.0% 0.9%
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