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Q2 Productivity Growth Close to Trend, Revisions Show Nation Was Less Efficient than Earlier Estimate

Mon, Aug 11 2008, 01:56 GMT
by Asha Bangalore

Northern Trust

Q2 Productivity Growth Close to Trend, Revisions Show Nation Was Less Efficient than Earlier Estimate

Productivity of the U.S. economy grew at an annual rate of 2.2% in the second quarter of 2008, after a 2.6% increase in the prior quarter. The second quarter reading of productivity growth is close to the 2.1% trend growth in productivity. On a year-to-year basis, productivity rose 2.8% in the second quarter vs. a 3.3% increase in the first quarter.

Unit labor costs (how much firms pay for each unit of output produced) fell to 1.3% in the second quarter, down from a 2.5% gain in the first quarter. On a year-to-year basis, unit labor costs advanced 1.5% compared with a 0.9% increase in the first quarter. Rapidly increasing unit labor costs point to gains in inflation. However, the latest reading on unit labor costs is noticeably smaller than the 4.4% year-to-year increase of the Consumer Price Index during the second quarter.

Compensation per hour moved up 3.6% in the second quarter after registering a 5.2% gain in the first quarter. On a year-to-year basis, compensation rose 4.3% vs. a 3.6% increase in the first quarter. This aspect of the report is bothersome but not threatening, as yet.

Productivity estimates were revised to reflect revisions of GDP estimates going back to the first quarter of 2005. After revisions productivity grew marginally slower in 2005 (1.7% vs. 1.9% in prior estimate) and 2007 (1.7% vs. 1.9% in prior estimate) but was unchanged at 1.0% in 2006. Productivity growth in the 2005-2007 period is markedly slower than the trend rate of 2.1%. In other words, the nation was less efficient than previously estimated. Also, the productivity gains in the 1996-2004 period stand out compared with the 2005-2007 span. A less productive labor force translates to a smaller economic pie to share.

Italian GDP Contracted in Q2

The first of the Euro-zone’s big economies reported preliminary Q2 GDP data today – and the picture was not a pretty one. Italy’s GDP contracted 0.3% q-o-q in Q2, and posted zero growth on the year.

That Italy’s economy is stalling out is no surprise – already one of the weaker economies in the 15-nation Euro-zone, data in recent weeks have pointed to a marked deceleration in the ‘zone’s third-largest economy. Consumer morale has plunged to near-15-year lows and business sentiment is the weakest it’s been in seven years. The Markit manufacturing PMI for Italy dropped further below the growth-contraction divide of 50.0 in July. The index reading of 45.3 was down from 46.9 in June, the fifth straight monthly decline and its weakest showing in nearly seven years.

Yesterday, the European Central Bank (ECB) left interest rates on hold at 4.25% and stated that risks to economic growth are starting to materialize. Euro-zone GDP almost certainly contracted in Q2 – Eurostat will release its flash estimate on August 14, the same day that Germany and France release their own first estimates. If the numbers surprise on the downside, the markets will start anticipating a rate cut from the ECB on September 4. However, bank policymakers continue to warn about inflation risks, and an easing is highly unlikely so soon after the last rate hike (on July 3). Euro-zone interest rates are probably on hold for the rest of this year – unless the ‘zone-wide slowdown starts to look like a collapse.

With Growth Slackening, Czech Central Bank Eases

As anticipated (see Daily Global Commentary, July 30: “Surging Central European Currencies: Running Out of Steam?”), the Czech central bank switched to easing mode yesterday, lowering its key repo rate by 25bps to 3.50% – the first actual cut in over four years. Governor Tuma noted that the Czech economy is in a “declining phase” and that a “bigger dampening” is now expected. The bank also lowered its GDP growth forecasts to 4.1% this year (prev. 4.7%) and 3.6% in 2009 (prev. 4.0%). Tuma also warned that he could not exclude another rate cut this year. The vote by the six-member policy board reportedly was unanimous.

Although July inflation picked up again, with annual CPI at 6.9% (6.7% in June), other data releases today confirmed the picture of a slowing economy. Industrial output rose just 2.2% on the year in June (3.4% in May), while the rate of unemployment accelerated to 5.3% in July from 5.0% in June. Last week, the Markit survey reported that the manufacturing sector PMI for July dropped to 49.9, down from 50.7 in June – the first time the index has slipped below the growth-contraction level of 50.0 in over five years.

It remains to be seen whether this week’s easing will be the first in a series for the Czechs, and neighboring Hungary and Poland are unlikely to switch to easing mode before Q4. However, any weakening in the crown over Q3 will likely not be enough to counter the economic slowdown heading into 2009. With a focus on the outlook 12-18 months ahead, the Czech central bank is likely to cut at least once more before the year is out.

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Published on  Mon, Aug 11 2008, 02:01 GMT