Productivity Rose 4% In 1st Qtr; Unit Labor Costs Under Control Crucial labor efficiency gained again - and that should keep the Fed happy for a while
Date: 5/12/99
Author: Claire Mencke for IBD
There was good news on the economic front Tuesday: Productivity continued its historic streak of gains, and unit labor costs stayed low. The results heartened those who are concerned that a tight labor market might spark inflation.
Productivity for nonfarm businesses, which measures output per hour, rose at a 4% annual rate in the first quarter, the Labor Department said.
That's a tad lower than the huge 4.3% gain in the fourth quarter, but quite a bit more than the 3% most experts predicted.
And it's a big step up from the 2.2% increase in productivity for all of 1998.
Year over year, productivity rose 2.8% in the first quarter - the best in nearly three years.
Also, unit labor costs inched up just 0.3% from the fourth quarter, and 1.3% year over year.
Analysts were impressed with the data. Productivity gains make it possible for high economic growth to coexist with low inflation.
The process works this way: If output rises faster than the number of hours worked, productivity rises. And if gains in unit labor costs don't outstrip gains in productivity, then inflation isn't a threat.
This doesn't mean that unit labor costs have to remain low - just that output has to grow at a faster rate.
In the key nonfarm sector, which includes about 80% of the economy, output gained 5% in the first quarter. Hours worked rose 0.9%.
Analysts marveled at the productivity report and at what it means for the economy.
''Here we are, eight or nine years into the economic cycle, and suddenly you get an acceleration in productivity'' in the past two quarters, said economist Greg Jones of Briefing.com.
''In four of the last five quarters, we've had productivity gains of more than 2%. And in five of the past seven quarters, of more than 2.5%,'' said Joseph Liro, market strategist at Stone & McCarthy Research Associates.
''The last two back-to-back increases of more than 4% were the first since the first half of 1983, when we were coming out of a big recession,'' he added.
''This time, it almost looks like what you're getting is not so much a cyclical acceleration as a tructural) one,'' Jones said.
In his speech at the Chicago Fed last week, Federal Reserve Chairman Alan Greenspan appeared to be making some of the same points, said David Orr, chief economist at First Union Capital Markets.
''He seemed to be saying the increases we're seeing in productivity are not just a cyclical phenomenon but structural,'' Orr said. ''Productivity is driving growth, not the other way around.''
Still, Orr warned, if national output were to slow, productivity would almost certainly suffer. ''That's what happened in the '70s and '80s,'' he said.
''You can't argue that productivity gains may not continue on the track they're on. But as long as wage gains don't get too much beyond 4.5%, productivity could stay around 2.5% or better. You'd have to have wage increases of 5% or better before you had significant pressure on productivity.''
The spur to productivity growth over the past three years has been information technology, many experts say. In that time, productivity has grown at a 2% to 2.5% yearly rate.
For many years prior to that, it looked like computers and automation were having little or no effect on productivity. Then the figure grew an average of only about 1% a year.
The substitution of capital for labor is a main factor in these strong productivity gains, many say.
''There are different confidence levels in how much this can occur,'' said Jones. ''(Fed Gov. Laurence) Meyer, for one, thinks it's already gone too far. Greenspan thinks there's a point at which the labor market can get too tight, but he's more agnostic about where that point is.''
But even Greenspan says there's a limit.
He said at the Chicago Fed's recent banking conference, ''Although productivity has accelerated in recent years, the impressive strength of domestic demand, in part driven by sharply rising equity prices, has meant that the substitution of capital for labor has been inadequate to prevent us from steadily depleting the pool of available workers.
''This worker depletion constitutes a critical upside risk to the inflation outlook because it presumably cannot continue without eventually putting increasing pressure on labor markets and on costs.''
Although technology is getting the credit for the fantastic productivity numbers, some market watchers are homing in on labor costs.
''We are at frictional levels with labor,'' said Liro. ''The biggest problem now is still labor shortages. But, that being said, it's being addressed more and more by corporations taking entry-level people and putting capital in training.
''There's much more investment in human capital. With the technical tools, you get them up the productivity curve faster.'' |
