Productivity Heads South as Labor Costs Keep Rising

The Bureau of Labor Statistics has released its report on nonfarm business sector labor productivity and unit labor costs for the first quarter of 2016. There has been a saying for years that productivity competes with unemployment — and productivity is down.

Nonfarm productivity decreased by 1.0% on an annualized rate during the first quarter of 2016. Bloomberg was calling for a drop of 1.2%, and the fourth quarter of 2016 was revised to −1.7% from the previous −2.2% report.

Output increased 0.4% and hours worked increased by 1.5%. From the first quarter of 2015 to the first quarter of 2016, the reading on productivity increased by 0.6%.

Unit labor costs in the nonfarm business sector increased by a sharp 4.1% in the first quarter of 2016. Bloomberg had the consensus estimate here at 3.5%, and the fourth-quarter gain was revised to a more tame 2.7% from the preliminary 3.3% reported.
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The higher unit labor costs were broken down as a 3.0% increase in hourly compensation and then influenced by a 1.0% decrease in productivity. Unit labor costs increased by 2.3% over the past four quarters.

Manufacturing sector labor productivity increased by 1.9% in the first quarter of 2016. That gain was as output increased by 0.7% and as the measure on hours worked decreased by 1.1%. Productivity increased by only 0.1% in the durable goods manufacturing sector, but increased by 4.4% in the nondurable goods sector.

It is one thing to see wages and employment costs rising when there is a strong economy and strong output. Unfortunately, these costs are rising in a weak economic environment and when productivity is heading south for the second straight report. This is effective what businesses will refer to as “stagflation” on the costs side of the business.