U.S. 2Q Productivity Growth Weakened, Costs Still Under Control

Labor productivity in the nonfarm business sector rose 2.2% at an annual rate last quarter. The increase fell short of Consensus expectations for a 2.5% rise while growth during 1Q and for all of last year was revised down.

Output growth last quarter did nearly double from 1Q to a still-modest 1.7% but the y/y rate of increase fell by roughly one percentage point to 1.8%. That was accompanied by a drop in total hours worked at a 0.5% annual rate (-1.0% y/y) which was one-third the 1Q rate of decline.

Growth in compensation per hour did slow to 3.6% from gains during the prior two quarters that were revised up. However, the y/y gain picked up moderately to 4.3% and that exceeded the accelerated rate of increase for all of last year.

Unit labor cost growth fell to 1.3% after the 2.5% gain during 1Q. Year-to-year growth in costs did pick up modestly, however, to 1.5% but that remained down compared to recent years.

In the factory sector, productivity fell at a 1.4% rate during 2Q (2.6% y/y) and the decline lowered year-to-year gain to its weakest since 1Q of last year. The deceleration occurred as y/y output growth slowed to roughly zero. As a result, unit labor costs rose at a 6.1% rate (1.9% y/y) and that q/q increase was the fastest since late 2006.

Multinationals Make the Most of IT from the Federal Reserve Bank of St. Louis is available here.

Creative Destruction, Documented from the Federal Reserve Bank of Richmond can be found here.

The OECD Trend-restored LEIs tell a story that is now becoming familiar in the markets. The US is still weakening. But Europe is weakening faster. Just today Italy reported a DECLINE in GDP for 2008Q2. Nout Wellink, an ECB board member, said the European growth would… “not look so good.” Europe has been slow to admit how much its economy is being impacted by oil and the financial crisis and the strong euro. Denial has its costs.

I think we have finally heard the last from those poor souls who argued that there was some sort of de-linkage going on in the global economy. Europe would still grow, China, India ..etc. But clearly the slowdown is hitting everyone. The Euro slowdown could become more severe and that is part of the OECD warning this morning as it sees a sharper slowing in the cards. OECD finds China and Brazil as relative bright spots. The OECD said that while its leading indicators point to slowdowns in the U.S., Japan, Germany, the U.K. and Canada, they point to "strong" slowdowns in France and Italy. For Russia and India, the leading indicators point to a downturn. Of course the definition of downturn is not universal. To a fast growing economy it could be just a big slowing in the growth rate. For most highly developed economies it means there will be some decline in GDP.

For now the OECD message is clear and that message is not welcome. Yet, neither is it a surprise to those who have paid attention. Europeans have for some time looked at the bright side of the picture and ignored the encroaching darkness. The ECB was bound and determined to hike rates due to its horrific inflation overshoot of its target. The ECB needed to see the strong the side of the economy to justify a rate hike.

For now it seems to me the central banks have been put in a very difficult position with a financial crises that crimped their ability to act boldly. At the same time huge and ongoing increases in oil prices struck. Exchange rates moved significantly as well. Looking back, policy seems to have been well calibrated despite headline inflation overshoot. The question may come to be asked if a core inflation target might not work better in the future (since if we assume the central banks more or less were really looking at core, their actions are easier to understand). The ECB so badly has missed its target it must have to wonder if wants to ever go though that again. However, relative to a core inflation target it is has not done so badly- nor has the Fed. We will have to see what lessons emerge from this still evolving period.

While policy may have done a good job it nonetheless has not been able to avoid the scars and scrapes on banks and on the real sector. Policy has done a good job but has worked no miracles. There is room for improvement. But first there is a policy to implement in a still nettlesome business cycle that is building downside strength.

Too much watching, not enough spending?

Japan’s economy watchers index has dropped sharply. Its components are all on 5-Year lows and have been that way for two months running. The NTC MFG index is on a five year low. The Teikoku industry readings are on five year lows. Japan’s own LEI has been weak but in the OECD treatment the trend restored indices have Japan’s index on a rising trend, but steady month-to-month. The readings in these Japan-based reports are much weaker than the OECD’s. And Japan is looking very weak.