GREENSPAN Equation: Lower productivity gains + higher labor costs + lower unemployment rates = 1/4 point rate hike. His work is then finished for the year. No more rate hikes.
I have boldened certain areas of interest in the report.
Another Bloomberg special:
U.S. 2nd-Qtr Non-Farm Productivity Rose at 1.3% Rate (Update2)
By Vince Golle
U.S. 2nd-Qtr Non-Farm Productivity Rose at 1.3% Rate (Update2)
(Adds closing financial markets in 10th paragraph.)
Washington, Aug. 5 (Bloomberg) -- U.S. worker productivity
rose at a smaller-than-expected rate in the second quarter, and
labor costs grew at their quickest pace in more than a year,
government figures showed today.
Non-farm productivity rose at a 1.3 percent annual rate in
the second quarter after a revised first-quarter pace of 3.6
percent, the Labor Department said. In addition, unit labor costs
-- which measures changes in worker compensation -- rose 3.8
percent, the fastest pace since a 4.1 percent rise in the fourth
quarter of 1997.
''This is one of the results of having tight labor markets
for some time,'' said Steve Wood, an economist at Banc of America
Securities LLC in San Francisco. Earlier today, the government
reported jobless claims last week moved to their second-lowest
level in two years.
The report could ''be a little worrisome'' to Federal
Reserve Chairman Alan Greenspan, who suggested in congressional
testimony last week the country cannot expect to sustain high
levels of productivity indefinitely, said Chris Rupkey, senior
financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York.
Still, ''I don't think this would show productivity, the
technology-based gains, are disappearing or rapidly eroding,''
Rupkey said. ''It's a one-quarter aberration.''
When compared with a year earlier, gains in productivity
still show stronger and increases in labor costs are less
pronounced.
Productivity rose 2.9 percent compared with the second
quarter of last year, the best year-over-year showing in three
years, Labor Department figures show. Unit labor costs increased
1.4 percent, close to the 1.3 percent year-over-year in the first
quarter. It's also below the 2 percent pace for all of last year.
Before the report, economists expected a 1.9 percent
increase in non-farm productivity for the second quarter, down
from the 3.5 percent first-quarter increase originally reported.
Analysts expected a 2.2 percent rise in unit labor costs for
the second quarter after a revised 0.8 percent increase in the
first three months of the year.
In financial markets, bonds rose as investors turned to the
safety of government securities instead of corporate securities.
Many companies are offering new issues before next year in case a
Year 2000 computer glitch damps demand. The price on the
government's 30-year benchmark Treasury bond rose 21/32, pushing
down the yield 5 basis points to 6.05 percent. The Dow Jones
Industrial Average rose 119.05 points, or 1.1 percent, to close
at 10793.82.
Hours worked rose 1.1 percent annual rate, after increasing
1.3 percent in the first quarter, while output increased at a 2.4
percent rate after a first-quarter gain of 5 percent.
Hourly wages adjusted for inflation rose at a 1.5 percent
annual rate in the second quarter following a 2.9 percent first-
quarter gain.
Price Deflator
The implicit price deflator -- a measure of inflation tied
to the productivity report -- rose at a 1.6 percent rate in the
second quarter after a 1.3 percent gain during the first three
months of the year.
Additionally, unit non-labor payments, which include such
items as taxes and rental payments, fell at a 2.3 percent rate in
the second quarter after a 2.4 percent gain in the first quarter.
For all of last year, productivity increased 2.2 percent.
Earlier today, the Labor Department reported the number of
first-time jobless claims rose 4,000 to 279,000 last week, the
second lowest level in two years.
Advances in productivity -- calculated as an index of worker
output per hour -- let companies such as Minnesota, Manufacturing
& Mining Co. reduce costs and boost sales. 3M's earnings per
share rose 9.6 percent in the second quarter compared with the
same three months in 1998, the company announced last month,
citing ''ongoing productivity improvement'' as reason.
Greenspan
Increases in worker productivity and business efficiency are
important reasons the economy can expand, and wages can rise,
without inflation accelerating. Companies have invested heavily
in computers and other innovations to boost efficiency and reduce
costs.
It's become ''increasingly evident'' increases in
productivity growth are holding down inflationary pressures,
Greenspan said in congressional testimony last week.
After languishing at about 1 percent in the 1970s and 1980s,
productivity growth has been above 2 percent the past three
years. It's exceeded that pace over the past five of the six
quarters, Labor figures showed.
Still, ''should the increments of gains in technology that
have fostered productivity slow, any extant pressures in the
labor market should ultimately show through to product prices,''
Greenspan said.
That's why investors will watch tomorrow's employment
figures for July to gauge whether employment conditions are so
strong that they could spark inflation and lead Fed policy-makers
to raise interest rates at this month's meeting.
If the nation's unemployment rate falls any further than the
4.2 percent to 4.3 percent rate of recent months, that would be
''one indication that inflation risks were rising,'' Greenspan
told Congress.
''There can be little doubt that, if the pool of job seekers
shrinks sufficiently, upward pressures on wage costs are
inevitable,'' Greenspan said. ''Such cost increases have
invariably presaged rising inflation in the past, and presumably
would in the future, which would threaten the economic
expansion.''
©1999 Bloomberg L.P. All rights reserved
Best, J.T.
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