US labour productivity registers unexpected drop in second quarter 2016

US labour productivity fell for a third consecutive quarter over the three months ending in June, pressuring labour costs higher despite slower wage growth, although inflationary pressures eased substantially, leaving economists divided on the implications of the data for monetary policy.

Non-farm labour productivity fell at a quarterly annualised pace of -0.5% over the three months to the end of June (consensus: 0.5%), according to the Bureau of Labor Statistics, as output rose by 1.2% yet hours worked grew at an even faster pace of 1.8%.

Together with a 1.5% rise in hourly compensation that saw so-called unit labour costs clock in at a quarterly annualised clip of 2.0% (consensus: 1.8%).

In comparison with a year ago labour productivity was down by 0.4% and unit labour costs 2.1% higher.

Productivity was previously reported to have risen by 0.7% in the twelve-month stretch to the end of March.

On a more positive note, revisions to data going back to 2014 showed that productivity grew by 0.9% in 2015 and not 0.7%.

Weak labour productivity makes the US central bank´s task harder in so far as it results in slower economic growth without any of the accompanying gains, relative to historical trends, in the form of lower price pressures.

The year-on-year increase in CLU was much lower than the 3.0% gain previously reported for the twelve months to the end of the first quarter.

As well, the rate of growth in unit labour costs for 2015 was revised lower from 2.3% to 2.1%.

Economists divided

Ian Shepherdson, chief economist at Pantheon Macroeconomics said: "The big picture for productivity has not changed significantly [...] the hourly compensation numbers used to calculate ULC have been absurdly low in the past two quarters, averaging just 0.4% at an annualized rate, and that will either be revised up or followed by outsized increases.

"The inflation threat from the labor market, is intensifying, in our view; these relatively benign-looking data don't change that."

On the other hand, Paul Ashworth, chief economist at Capital Economics, said: "These downward revisions [to the year-on-year CLU figures] should leave Fed officials even more confident that the upward pressure on domestic prices remains muted. That is another reason to believe the Fed will wait until December before raising interest rates again," said Paul Ashworth, chief economist at Capital Economics.