Productivity and Unit Labor Costs 1st Quarter 2018

Productivity improved slowly in the first quarter of 2018, but at least it increased.  According to the Bureau of Labor Statistics (BLS), this measure of economic efficiency rose just 0.7 percent on an annualized basis, but that uptick is an improvement compared to the unchanged tally in the fourth quarter of 2017.  Additionally, unit labor costs rose 2.7 percent, rising from 2.5 percent.

Output slowed for a second consecutive quarter while hours worked decelerated as well.  America’s economy grew 2.8 percent on an annualized basis according to the BLS, falling from 3.7 percent in the fourth quarter and 4.1 percent in the third quarter of 2017.  The period’s growth was partially offset by an increase in the number of hours worked which rose 2.1 percent.  When combined, these two components net the 0.7 percent increase in productivity.

Wage increases put upward pressure on unit labor costs.  Remember, the BLS calculates unit labor costs by comparing changes in labor productivity to hourly compensation.  Labor productivity gains lead to lower unit labor costs while wage gains cause them to rise.  Since productivity rose just 0.7 percent while hourly wages rose 3.4 percent, unit labor costs for the nonfarm business sector increased 2.7 percent, accelerating for the third consecutive quarter.  However, unit labor costs have only increased 1.1 percent in the past twelve months, actually decelerating from 1.6 percent at the end of 2017.

Productivity continues to be lackluster in the current expansion.  This could be one of the primary explanations for the tepid pace of America’s economy.  It might also help explain the extremely low unemployment rate; firms seem more content hiring versus investing in capital equipment.  Capital equipment is typically considered a long-term commitment which needs to be paid for even if sales slow, while employees’ hours can be cut or eliminated altogether when times get tough.  The trend of capital outlays by firms is decelerating after reaching a recent peak in October, leading Atlas to believe productivity gains will continue struggling in the months ahead.