Productivity Rebounds in 2Q, but Trend Still Soft

Economy GDP
Lynne Sladky/APNatasha Portuondo, center, sifts flour over baskets as she and Adina Robles, right, make bread at Zak the Baker, in Miami.
By Lucia Mutikani

WASHINGTON -- U.S. nonfarm productivity rebounded in the second quarter, but a weak underlying trend suggested inflation could pick up more quickly than economists have anticipated.

Productivity increased at a 1.3 percent annual rate in the April-June period, the Labor Department said Tuesday. But productivity, which measures hourly output per worker, rose only 0.3 percent from a year ago.

%VIRTUAL-pullquote-What it means is that inflation could be more problematic down the road, but we haven't seen it yet.%In line with annual revisions to gross domestic product published last week, first quarter productivity was revised to show it falling at a 1.1 percent rate instead of the previously reported 3.1 percent pace of decline.

"What it means is that inflation could be more problematic down the road, but we haven't seen it yet. It's something to think about long term," said Gennadiy Goldberg, an economist at TD Securities in New York.

Productivity is one of the metrics the Federal Reserve is watching as it contemplates raising interest rates for the first time in nearly a decade. Economists had forecast productivity rising at a 1.6 percent rate in the second quarter. The economy grew at a 2.3 percent annual pace in the period.

U.S. financial markets were little moved by the data, with investors focused on China's devaluation of its currency. U.S. Treasuries prices were trading higher, while U.S. stocks and the dollar fell.

Annual revisions showed productivity was unchanged in 2013, the weakest annual reading since 1982. Productivity in 2013 was previously reported to have increased at a 1.2 percent rate.

The average annual rate of productivity growth from 2007 to 2014 was revised down to 1.3 percent a year from 1.4 percent, well below the long-term rate of 2.2 percent a year from 1947 to 2014.

Output Gap Shrinking Faster?

Growth in productivity is an important determinant of the economy's non-inflationary speed limit. The downward revisions suggested the economy's growth potential could be lower than the 1.5 to 2 percent pace that economists have been estimating.

That would imply the spare capacity in the economy is being squeezed out more quickly than thought and that inflation pressures may take hold a bit faster than had been anticipated.

"We are growing much faster versus potential than we had previously thought. So the output gap over the more recent time frame looks like it is closing at a faster rate than we had thought prior to GDP benchmark revisions," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York.

"The faster you close the output gap, the faster you get to that threshold where you start to see inflationary pressures."

But inflation remains benign for now. Unit labor costs, the price of labor per single unit of output, rose at only a 0.5 percent rate in the second quarter after advancing at a downwardly revised 2.3 percent pace in the first quarter.

They were previously reported to have increased at a 6.7 percent rate in the January-March period. Unit labor costs rose 2.1 percent compared to the second quarter of 2014.

Compensation an hour increased at a 1.8 percent rate in the second quarter after rising at a downwardly revised 1.1 percent pace in the first quarter.

Compensation was previously reported to have increased at a 3.3 percent rate in the first quarter. It was up 2.4 percent compared to the second quarter of 2014.

A separate report from the Commerce Department showed wholesale inventories increased 0.9 percent in June, higher than the 0.7 percent rise the government had forecast in the advance second-quarter GDP estimate.

June data on factory inventories and imports published last week suggested the GDP growth estimate could be revised to as high as a 3 percent rate.

9 Numbers That'll Tell You How the Economy's Really Doing
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Productivity Rebounds in 2Q, but Trend Still Soft
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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