Nonfarm Productivity Collapses Greater Than Expected 3.1%, Unit Labor Costs Rise 6.7%; Transitory Weakness?

Economists overestimated Q1 productivity and underestimated Q1 unit labor costs in spite of blaming the weather and the port strike as transitory weakness.

Let's take a look at Bloomberg Consensus Estimates for Productivity and Costs.

The grinding halt that the economy came to the first quarter pulled nonfarm productivity down by 3.1 percent and inflated unit labor costs by 6.7 percent. These are more severe than the initial data released a month ago where productivity was pegged at minus 1.9 percent and unit labor costs at plus 5.0 percent. Output as measured in this report fell 1.6 percent in the quarter at the same time that hours worked rose 1.6 percent. Adding to labor costs was a sharp 3.3 percent rise in compensation.

Looking year-on-year, productivity is on the plus side, though just barely, at 0.3 percent with labor costs more tame, at plus 1.8 percent. Should the second-quarter see the bounce as many suspect, productivity, compared to the first quarter, should improve and labor costs cool.

Productivity and Costs

Let's now turn our attention to the BLS Report on Productivity and Costs for Q1.

Nonfarm Productivity

• Nonfarm business sector labor productivity decreased at a 3.1 percent annual rate during the first quarter of 2015, the U.S. Bureau of Labor Statistics reported today, as output declined 1.6 percent and hours worked increased 1.6 percent. (All quarterly percent changes in this release are seasonally adjusted annual rates.)
• Unit labor costs in the nonfarm business sector increased 6.7 percent in the first quarter of 2 015, reflecting a 3.3 percent increase in hourly compensation and a 3.1 percent decline in productivity.

Manufacturing Productivity

• Manufacturing sector labor productivity decreased 1.0 percent in the first quarter of 2015, as output decreased 1.1 percent and hours worked edged down 0.1 percent.
• Productivity decreased 3.3 percent in the durable manufacturing sector and increased 1.5 percent in the nondurable goods sector.

Revisions

• In the first quarter of 2015, nonfarm business productivity fell 3.1 percent, a greater decline than was reported in the preliminary estimate. The revised estimate reflects a 1.4 percentage point downward revision to output and a small downward revision to hours.
• Unit labor costs were revised up as the result of a 1.2 percentage point downward revision to productivity and a 0.2 percentage point upward revision to hourly compensation.
• In the manufacturing sector, productivity in the first quarter declined 1.0 percent, slightly less than the preliminary estimate. Unit labor costs increased 3.4 percent, rather than 2.7 percent as previously reported, due to a 0.9 percentage point upward revision to hourly compensation.

Transitory Weakness?

Output is lower, costs higher. This will hit bottom line profit margins.

Ben Bernanke says it's transitory. Christine Lagarde at the IMF sang the same tune today, likely confirming that it's not transitory.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com