Unit Labor Costs and Productivity Very Mixed, With Crazy Revisions

We had already seen a higher GDP report for the second quarter and saw a much higher Employment Cost Index report, and non-farm productivity followed suit. Productivity rose 2.5% versus a 1.4% consensus expected by Bloomberg. Here is the problem – the first quarter reading was revised from a dismal -3.2% down to an even worse -4.5%. While these numbers are quarter-over-quarter and are very volatile, this means that the higher than expected report for the second quarter was negated by a negative revision in the first quarter.

Unit labor cost implications were our biggest concern, and now they remain our biggest concern due to a massive revision. Second quarter unit labor costs were up by only 0.6%, a full point shy of the 1.6% gain expected by Bloomberg. The problem here is the first quarter revision – rising from a preliminary hot 5.7% up to a massively higher 11.8% gain.

Component readings were as follows:

• non-farm output rose by 5.2%in Q2;
• compensation rose by 3.1% in Q2, but that was versus 6.8% in Q1;
• and hours worked rose 2.7% in Q2.

The final verdict for the second quarter labor costs and productivity is one of confusion. The second quarter reports were mixed on a standalone basis, but then the revisions to the first quarter only added more confusion. We would signal that this seems to feel as though the economy remains on a path of a return to normal growth with only a very moderate cost pressure scenario.