Weekly Economic Trends & Indicators
The Headline
According to the Bureau of Labor Statistics (BLS), nonfarm business sector productivity in the U.S. increased 3.0% in the fourth quarter of 2022. For the year, average productivity decreased by 1.3% from 2021 to 2022. Unit labor costs increased by 1.1% for the quarter and 4.5% for the year.
The Details
Productivity, as reported by the BLS, is calculated as output per hour. Consequently, the percentage change in productivity is simply the difference between the percentage change in total output minus the percentage change in hours worked. In the fourth quarter, total output increased by 3.5% while hours worked increased by 0.5%, resulting in a 3.0% increase in productivity. Similarly, unit labor costs are hourly compensation divided by productivity. In the fourth quarter, hourly compensation grew by 4.1% while productivity grew by 3.0%, resulting in the 1.1% increase in unit labor cost for the quarter.
The Context
Productivity growth is an important part of the overall economic picture. A strong trend in productivity growth can lead to growth in gross domestic product while keeping inflation contained. In last week’s installment, we looked at the recent Federal Reserve decision and the expected path for interest rates for 2023. Whether productivity and unit labor costs are rising or falling will influence the Fed’s decisions.
The 3.0% increase in productivity in the fourth quarter was better than expected, and because productivity is in the denominator of the unit labor cost calculation, this strong performance helped to keep the growth of unit labor costs lower. This is encouraging for the inflation outlook.
Overall, productivity had been trending down over the last couple of decades, particularly after the 2008 financial crisis. The recovery from COVID-19 in 2021 brought a resurgence in productivity across all sectors, including manufacturing. In 2022, the pendulum swung the other direction as demand started to fall, but employment remained strong. With layoffs already hitting some sectors and more expected in 2023, this may provide a little support to productivity growth and keep labor costs from climbing further.
Inflation seems to be moderating as we move from 2022 to 2023. Good productivity growth will help continue to moderate inflation. However, productivity numbers are notoriously difficult to predict, and the larger than usual amount of volatility post-COVID-19 is making it even more difficult. The Fed will need more than one good quarter of productivity growth to determine whether there is truly a change in the economic fundamentals. This is a statistic that will bear watching this year.
Next week: The Consumer Price Index and Producer Price Index for January will be released on Tuesday and Thursday, respectively. We will take a closer look at these numbers.
