Weekly Economic Trends and Indicators

The Headline:

Earlier this month, the Bureau of Labor Statistics (BLS) reported that nonfarm business sector labor productivity increased by 0.3% (seasonally adjusted annual rate) in the first quarter of 2024. Compared to the same quarter a year ago, this most common indicator of productivity increased by 2.9%. In the same report, unit labor costs increased by 4.7% (seasonally adjusted annual rate) in the first quarter and 1.8% compared to the first quarter of 2023.

The Details:

The index of nonfarm business sector labor productivity (sometimes simply referred to as “labor productivity” or even just “productivity” as this is the most commonly used statistic to represent productivity) is calculated as the ratio of the inflation-adjusted value of output to the number of hours worked. In other words, productivity is a measure of the value of output per hour adjusted for inflation. Similarly, unit labor costs are the ratio of inflation-adjusted hourly compensation to labor productivity.

The Context:

Because of the way it is calculated, the growth of labor productivity can come from either an increase in output or a decrease in hours. Over the course of the last year, nonfarm business output has grown at a healthy pace (about 3.2%) while hours worked only increased about 0.3%. This gives us the 2.9% annual rate of productivity growth mentioned above. However, in the first quarter specifically, nonfarm business output growth decreased to around 1.3%. (Recall that GDP growth was about 1.6%.) At the same time hours worked increased by about 1.0% (seasonally adjusted annual rate). This yields the 0.3% increase in labor productivity in the first quarter.

While productivity growth over the last year still looks good because of the last three quarters of 2023, the first quarter of 2024 represents a significant drop. Recall that in our last blog update we noted that productivity growth provides the economy with the cushion that makes a “soft landing” possible by allowing room for growth without accelerating inflation. When productivity growth slows, that cushion gets taken away and inflation tends to move more closely with GDP, making it harder to bring inflation down without risking a decline in GDP. Lower productivity growth also causes unit labor costs to rise faster, as the current data also shows.

Productivity can be a noisy signal, however. That is, one data point does not necessarily mean a change in the trend. It is possible that the second quarter will look more like what we saw last year. However, even a momentary slowdown in productivity growth can have consequences for inflation expectations. On Friday morning, the University of Michigan Survey of Consumers showed an increase in one-year inflation expectations going from 3.2% last month to 3.5% in May, the highest reading since last November. While the Fed’s inflation fight was helped by good productivity growth in 2023, it appears that, at least for now, the wind is no longer at their back.

Next week: Inflation update