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Economy in Brief

U.S. Productivity Down in Q4 But Up for All of 2007; Factory Sector Costs Up
by Tom Moeller February 6, 2008

Nonfarm labor productivity growth last quarter slowed considerably to 1.8% from a little revised 6.0% during 3Q07. The preliminary 4Q figure beat Consensus expectations for a 0.5% rise. Despite the 4Q slowdown, productivity growth of 1.6% for all of last year was up from the measly 1.0% rate during 2006 due to that 6.0% 3Q spurt.

Output growth last quarter did indeed decelerate sharply to just 0.4% from 5.6% during 3Q but a decline in hours worked to a 1.5% rate of decline was the sharpest fall of three during 2007. For all of last year hours worked rose 0.7% y/y.

Compensation per hour last quarter held roughly steady with 3Q at a 3.9% rate of growth. Despite that stability compensation growth for the year accelerated to a 4.8% rate of growth which was the quickest since 2000.

That stability of compensation in the face of slower productivity raised unit labor cost growth to 2.1% from its 3Q decline by a like amount. The Consensus expectation had been for 3.5% growth in unit labor costs. The 4Q rise was enough to lift the gain in labor costs for the full year by 3.1% That was slightly ahead of the 2006 increase but it also was the quickest since 2000.

Productivity in the factory sector eased to a 2.5% growth rate from a downwardly revised 4.0% during 3Q. For all of 2007 factory sector productivity rose 2.9%, the slowest rate of growth since 2001. The weakness in productivity resulted as output growth slowed to -1.9% from 3.9% in 3Q and that outpaced the slowdown in hours worked to -4.3% from -0.1%. The 4.2% rise in factory sector compensation pulled unit labor costs up 1.7% after a 2.9% 3Q decline. For the full year unit labor costs in the factory sector rose 1.6% after two years of negative growth and that rate of increase was the quickest since 2000.

The January 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve Board is available here.

How well do wages follow productivity growth? from the Federal Reserve Bank of St. Louis can be found here.

Non-farm Business Sector (SAAR) Q4 '07 Q3 '07 Y/Y 2007 2006 2005
Output per Hour 1.8% 6.0% 2.6% 1.6% 1.0% 1.9%
Compensation per Hour 3.9% 4.0% 3.7% 4.8% 3.9% 4.0%
Unit Labor Costs 2.1% -1.9% 1.0% 3.1% 2.9% 2.0%
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