U.S. Productivity Down in Q4 But Up for All of 2007; Factory Sector Costs Up

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.

Not every inflation report or trend in the EMU is bad news. But the news is still not pleasing to an ECB that is trying to inherit the mantel of inflation fighting respectability from the Bundesbank. Inflation in the Euro Area consists of an overall HICP measure but there is also the country level data that contribute to the HICP. Italy’s new inflation report is shown below. Headline inflation slowed sharply in January and the three-month growth rate edged slightly lower from its six-month value. Even so, that rate is unacceptably high. Across categories inflation slowed producing a diffusion rate of 42% implying that the deceleration was relatively widespread. But over six months diffusion shows that it has accelerated and over 12 months it is about the same as it was a year ago in terms of the breadth of the acceleration/deceleration (diffusion) even though it is higher in terms of the headline and the core.

The chart shows that the core rate has been steadily accelerating. But if energy prices abate that trend should be truncated. In short Italy’s data are the exact reason that the ECB remains wary. While the current month hints at a break in the pace the trends are simply not good enough to take the ECB off guard.

French sequential growth rates are working their way lower for the volume of total retail sales. Passenger car registrations have, however, picked up a bit. The spike up in car registrations has to do with some changing regulations in France and are clustering sales into the current periods much as they did at the end of 2006 for Germany as buyers there tried to avoid the coming VAT hike. The overall retail numbers do not show much of this effect since the impact is for an auto-specific change related to environmental concerns.

Retail sales volumes in France continue to move ahead at a 2% pace over three months, a bit less than their 3% yr/yr rate and the same as the year ago pace of 2%. French consumers, like other Euro Area consumers are having a hard time getting spending on track. With the new financial turmoil, higher energy prices, strong euro and slowing economy, the consumer may not turn that corner to better times.