Revised First Quarter 2015 Productivity

Productivity figures for the first quarter of 2015 were given a big revision after more complete data were collected by the Bureau of Labor Statistics.  Not only was productivity worse than expected, labor expenses grew faster than the earlier estimate, so unit labor costs increased by even more than first tallied.  Falling output with growing expenses is not a good combination.

Productivity dropped 3.1 percent in the period.  This is a major downward revision from the initial estimate of a -1.9 percent.  The revised figure now indicates the nation’s productivity is contracting at a faster rate (down 3.1 percent) than in the fourth quarter of 2014 when it declined 2.1 percent.  Output contracted in the first three months of the year by 1.6 percent while hours work climbed 1.6 percent.  Additionally, unit labor costs jumped more than initially estimated, up 6.7 percent versus 5.0 percent in the earlier count as compensation per hour rose 3.3 percent in combination with the 3.1 percent decrease in productivity.  Before it all begins to look too gloomy, it is worth noting that unit labor costs are only up 1.8 percent in the past year, these figures can be very lumpy, so this longer look adds some perspective.

The revisions in this indicator were expected to be bad since gross domestic product was revised lower and employment figures continued to improve.  Two quarters of declining productivity raises eyebrows here at Atlas because of the likely consequence of lower profitability to firms or building inflationary pressures.  For now, companies seem willing to act as if the falling productivity is a short-term phenomenon, but if it continues, businesses may need to react by getting rid of the least productive employees and possibly substitute workers with machines.  A change in the strong trend of hiring could be one of the first places this shows up.  Stay tuned.    (by C. Cox)