Second Quarter Productivity and Costs

America was more productive in the second quarter than initially thought according to the revised figures put out by the Bureau of Labor Statistics that measure the amount of output relative to hours worked.  Nonfarm business sector labor productivity grew by an annualized 2.2 percent for the quarter (versus the initial reading of 1.6 percent) and is up 1.2 percent year-over-year.  The labor cost per unit of output increased 1.5 percent from April to June as hourly compensation jumped by an annualized 3.7 percent; unit labor costs have climbed 0.9 percent in the last twelve months.

The added efficiency came as output increased faster than the number of hours worked in both the quarterly and annual figures.  But the employees did not go unrewarded for the added production, and since their income grew faster than output per hour, the additional compensation must be paid for by somebody.  The two likely payers are corporate profits or consumers via inflation.  Company owners do not like to see profits fall, so they will likely attempt to pass it on to the final buyers.  If it does leak out as an increase in prices, the 1.5 percent annualized uptick is within the normal range of the last twenty years.

The Federal Reserve must still feel comfortable with some higher amount of inflation since it continues to pile on monetary easing in an attempt to stimulate the economy.  If the acceleration of labor costs continues, the central bank may remain accommodative to encourage even further inflation.  Many argue that the actions by central banks around the globe are without precedent and must eventually result in significantly higher prices.  It is an understandable concern, but with wage increases still relatively normal after years of stimulating, central bankers seem to feel they have room to remain abnormal in their responses to the sluggish pace of growth in the U.S. and the rest of the world.     (by C. Cox)