Productivity And Costs Report Shows Wage Pressures

Wage pressures, especially relative to output, are appearing in the productivity and costs report. Unit labor costs, measured quarter to quarter, jumped to a much higher-than-expected annualized rate of 1.8 percent in the third quarter, up 4 tenths from the first estimate and twice expectations. The revised jump reflects a 4.0 percent rise in compensation, up from an initial 3.0 percent, and an upward revision to hours worked, now at minus 0.3 percent vs minus 0.5 percent.

What was supposed to contain labor costs was higher output, which indeed is revised 6 tenths higher to plus 1.8 percent. This helps lift productivity to a 2.2 percent rate, which is down from 3.5 percent in the second quarter but up from negative readings in the prior two quarters (minus 1.1 and minus 2.2 percent).

A look at year-on-year rates shows how soft productivity growth is, at plus 0.6 percent in the quarter vs a post-war average of plus 2.2 percent. Labor costs are up 3.0 percent year-on-year.

Though a rise in labor costs is not being signaled by other data, this report is certain to be considered closely by FOMC policy makers. Low productivity, and rising labor costs along with it, point to the effects of full employment and limited investment in new technologies.

Recent History Of This Indicator:
Held down by soft output, non-farm productivity came in at an initial plus 1.6 percent though some improvement, based on a 6 tenths upward revision to third-quarter GDP to plus 2.1 percent, is expected for the second estimate, at plus 2.2 percent. Better output in turn is expected to lower third-quarter unit labor costs which are expected to be revised to plus 0.9 percent from plus 1.4 percent in the first estimate.