The unprecedented surge in US productivity that began during the recession is fading although, that said, productivity is still growing at a pace that most other developed countries can only dream of. Non-farm productivity increased by 2.6% annualized in Q4 but, over 2010 as a whole, productivity increased by a more ‘modest’ 1.7%, down from a 6.2% gain in 2009. The corresponding rapid decline in unit labour costs that began during the recession is also fading. Despite a 0.6% annualized decline in unit labour costs in Q4, they fell by only 0.2% over 2010 as a whole, compared with a 3.5% decline in 2009. Nevertheless, even if unit labour costs aren't falling quite as rapidly, they are still falling and will offset some of the upward pressure on final prices stemming from higher commodity prices. There is a good chance that productivity will slow further this year, as firms are increasingly forced to hire more workers to expand output. That is good news for the unemployed, but the productivity slowdown is another reason to suspect corporate profit growth will also fade over the next 12 months.
As mentioned above, the year-over-year rate of productivity growth has slowed from the massive 6.3% a year ago to 1.7% now, but this is nothing to worry about. Recent cycles have seen huge early gains in productivity followed by moderations. In 2005/6, the moderation continued but this reflected a slowing in GDP growth; I do not expect to see that now. Unit labour costs are down 0.2% y/y, again less spectacular than this time last year, when they were down 2.9%, but that was never going to be sustainable. Falling labour costs keep the downward pressure on core inflation and boost margins too; labour accounts for more than 75% of all costs.
Jobless claims fell to 415,000, below the consensus 420,000, from last week's elevated 457,000. The Labor Department said claims were elevated last week because of the delayed processing of data from four southern states which had been severely affected by snow; these new data support that assertion. I think the trend in claims is coming down because small firms are firing fewer people. The Challenger survey of layoff announcements makes it clear large firms have dramatically reduced their layoffs, but I think the tightness of credit has kept the pressure on smaller businesses. With credit now easing, I am hopeful claims will fall significantly further over the next few months.
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