4Q Productivity Up
Productivity of the nonfarm business sector rose at a 1.6% annual rate in the fourth quarter, weaker than the 3.0% pace estimated a month ago. Read full government report.
Unit labor costs -- a gauge of wage push inflationary pressures - were revised higher to a 6.6% annualized gain from a 1.7% increase. Unit labor costs are the costs paid to workers to produce one "unit" of output. This is the largest quarterly gain since the first three months of 2006.
Unit labor costs have increased 3.2% in the past year, the fastest pace since 2000.
"This data will likely continue to keep the Fed focused on the risks of rising inflation," said Drew Matus, economist at Lehman Brothers.
Economists expected productivity to be revised to a 1.4% annual pace, based on revisions to output and hours worked already reported in the gross domestic product data. But unit labor costs came in higher than the 3.4% expected by economists surveyed by MarketWatch. See Economic Calendar. Productivity fell at a 0.6% annual pace in the third quarter.
The Commerce Department cut its fourth-quarter GDP estimate to a 2.2% growth rate from the previous estimate of a 3.5% pace.
Because the quarterly data are so volatile, most economists take a longer view of a year or more when analyzing productivity.
Productivity has increased 1.6% in the past year. This is the lowest annual growth rate since 1997. Productivity has slowed every year since peaking at a 4.1% annual rate in 2002.
But productivity is still above the 1.6% pace that prevailed from the mid-1970s through the mid-1990s.
Real hourly compensation (that is, adjusted for inflation) rose 10.5% in the fourth quarter
The report suggests that the Fed may be reluctant to cut interest rates even if the economy slows.
In the last two weeks, the market has recently been raising the odds of a rate cut in the second half of the year given the recent volatility in financial markets. Read complete Fed coverage.
"The higher labor costs make the Fed's decision making more difficult," said Joel Naroff, president of Naroff Economic Advisors.
"Three sluggish quarters of economic growth should have created the environment for an ease. But with cost pressures rising, inflation concerns have to remain high. Welcome to the Gordian Knot of monetary policy," Naroff said in a research note.
Fed officials are worried that higher wages will ultimately be passed to consumers in the form of higher prices.
There is a debate among Fed officials and economists whether corporations could be able to absorb the higher labor costs because of their high profit margins.
Productivity, defined as output per hour worked, is perhaps the most important long-term variable in economics.
Higher productivity can mean higher profits, wages and living standards and can keep inflationary pressures at bay. But the concept is difficult to measure, especially in financial services where the concept of a "unit" of output is murky.
In the manufacturing sector, productivity increased at a 2.2% annual pace in the fourth quarter while unit labor costs rose 4.7%. Manufacturing productivity is up 4.0% in the past year while unit labor costs are down 0.2%.