Perhaps the main point to make about today’s Productivity and Cost report for the fourth quarter is, wait a month. A couple weeks ago, an analyst at the BLS confirmed for me that the current-vintage productivity data do not yet incorporate the downward revisions to employment — and thus labor input — that are fated to be released in the official employment data tomorrow.
A month from now, the productivity figures will be revised noticeably higher (1/2 — 3/4 ppts) for the four quarters through the first quarter of 2024. That will not affect our sense of the very recent momentum, but it is relevant anyway, because when it comes to productivity our sense of the underlying trend is conditioned by the longer run of data, which will certainly look stronger.
As for this morning’s data, they were benign in the sense that productivity growth was reported at the consensus value, with a tiny upward revision to Q3, and unit labor costs were both lower than expected, although firm outright, and revised downward for Q3. In principle, the downward revisions to Q3 might have been expected. I don’t know, but they were not large enough to matter anyway, given the typical volatility in these data.
The outright advance of productivity during the fourth quarter is reported to have been mediocre, 1.2% in the recent quarter vs 2.3% in Q3. But these data, such as they are, remain consistent with my sense – based purely on eyeballing – that there has been an inflection higher in the underlying rate of productivity growth post Covid. I am not saying Covid was the cause, although it may have been, by stressing corporate satisficing. I refer there only to the timing. And remember, the productivity numbers are going to get revised up in level terms for the period seven quarters ago to three.
This looks ok, and it will look better on revision
Source: Federal Reserve Bank of St. Louis (FRED), BEA, FH calculations and estimates (of recent depreciation)
Data are actual to Q4 but are subject to upward revision, as discussed in the text.
As mentioned, short run trends in the data from the Productivity and Cost report can’t tell us much about what is going on right now, because the two main inputs there, productivity and average hourly compensation (AHC), are far too noisy. For example, if you want to discern the underlying trend of unit labor cost (ULC) growth, you should skip right past the ULC data. They show a trend of about 2%, which seems representative, but only coincidentally. No, we try to get a sense of the underlying productivity trend growth rate, particularly as perceived by wage setters, and then compare that with the Employment Cost Index (ECI) duly adjusted for its various (hopefully roughly stable) biases, suggests for the underlying trend of compensation. That gets you to about 2%, but nor for reasons I need to update much today.
Having said that, there is one figure from the productivity and cost report that we can take roughly at face value, at least absent expected data revisions. And that is the labor share of value added (best measured as net, for reasons I need not get into here), which can be inferred from the ratio of (net) unit labor costs to the value-added deflator for the nonfarm business sector. Note that if you multiply both ULC and prices by real output, you get an index of the ratio of total labor compensation to value added, i.e., the labor share.
The labor share was revised downward slightly for Q3, and it rose slightly less than expected during Q4. But that is not the point. The point is that the level of the labor share is very low, which supports the view that there may be room for labor compensation to pick up a bit here as part of a restoration of normal profit margins, rather than as part of an inflation process. I would not lean very hard on the view that analysts know what the “normal” level of the labor share is. And graveyards are full of strategists previously looking for a mean reversion of profit margins. DO NOT DO THAT. But for those concerned with this issue, a labor share pinned to the lows is better than one that looks elevated.
Incidentally, I should mention that the coming upward revision to productivity growth does not necessarily mean that ULCs will be revised lower or that the implied labor share will be so. The reason is that the source data implying a downward revision in labor input also found more income! But even a slight upward revision in the reported labor share would not change the fundamental point raised above.
Internalizing that this is very low in level terms will not steer you wrong
Source: Federal Reserve Bank of St. Louis (FRED), BEA, FH calculations and estimates (of recent depreciation)
Data are actual to Q4.
