WHAT IT MEANS:
- INDICATOR: Third Quarter Productivity and Costs, October Layoffs and Weekly Jobless Claims
- KEY DATA: Productivity: 1.6%; Durable Manufacturing: 7.3%; Unit Labor Costs: 1.4%; Real Compensation: 2.2%/ Layoffs: 50,504; Unemployment Claims: +16,000
- IN A NUTSHELL: “Productivity is holding up, but labor costs are rising slowly and that is something the Fed looks at very closely.”
It is an article of faith that the economy is underperforming. But what does that mean?
Economists compare actual growth rates with potential growth rates, which is the combination of labor force and productivity growth. When you look at those, the economy actually is not doing badly, though for all the wrong reasons. Productivity rose decently in the third quarter, which was a surprise given the modest growth pace.
The key was a sharp cut back in hours worked, not a lot more production. The durable goods manufacturing sector led the way as firms produced a lot more but with fewer hours worked by its employees. Otherwise, productivity gains were muted. We look to be on pace for another year of sub-1% productivity gains, which is very disappointing. Labor compensation continues to rise. Adjusting for inflation, there has been a steady increase over the past few years. With the labor force also growing by less than 1%, the potential growth rate remains below 2%, where it has been for five years now. That makes 2.25% GDP growth look just fine – though it really isn’t.
Businesses are slowing their layoff announcements, which have soared this year. Challenger, Gray and Christmas reported that cut backs were down in October both from September’s level and from October 2014. So far this year, announcements are up over 30%. The huge retrenchment in the energy sector and military reductions account for almost all of this year’s gains. That doesn’t mean that other sectors weren’t up as well, but looking toward 2016, the budget agreement and more stable prices should mean fewer layoffs in those areas.
Unemployment claims jumped last week, but the four-week average is still quite low. The labor market is tight and getting even tighter, though that doesn’t seem to faze businesses. They don’t seem in any hurry to increase wages to attract new workers.
MARKETS AND FED POLICY IMPLICATIONS:
If the Fed was expecting that low interest rates would trigger greater capital formation and increased productivity, it may have to rethink its theory. Actually, the members probably already recognize that their low rate approach has largely hit a wall, which is why Chair Yellen seems to be looking for any excuse to start raising rates.
That reason could come tomorrow, but this “data dependency” concept means that volatile numbers that are frequently revised, sometimes dramatically, drive policy. That hardly makes much sense. Just consider that the initial estimate of second quarter GDP growth was 2.3% and the final estimate was 3.9%.
Job numbers sometimes are revised sharply and does anyone even know what the average hourly wage measures?
So yes, data matter, but the few numbers that come out between meetings shouldn’t be the be all and end all of Fed decisions. That said, let’s hope for a really good October employment report since it would indicate the economy is strong and let the Fed start taking baby-steps toward more normal interest rates.
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