INDICATOR: Second Quarter Productivity and Costs
KEY DATA: Productivity: +2.5%; Output: +5.2%; Real Hourly Compensation: +0.1%; Unit Labor Costs: 0.6%
IN A NUTSHELL: "Productivity rebounded, keeping business costs low as wage gains remain largely under control."
WHAT IT MEANS: Rising wages don't have to be a major problem for firms as long as workers offset those increases with improved output. Unit labor costs, which reflect the balance between wages and production, edged upward in the spring. Strong spring economic growth, a reflection of the rebound from the winter weather-restrained production in the first quarter, offset an increase in wages. Indeed, there was a huge rise in labor costs in the first quarter, which points out that the quarter-to-quarter numbers really don't mean a whole lot. Smoothing out the data by looking at the year-over-year numbers gives a better indication of what is happening with productivity and costs. If you want to know about the potential for consumer spending to rise faster, just look at compensation adjusted for inflation. Real hourly compensation was at the same level in 2013 as it was in 2007. But that may finally be changing, at least a little. While workers inflation-adjusted income fell by 0.3% in 2013, it is rising at about a 1.5% during the first half of the year. If wage gains accelerate, as I expect, we might actually hit 2%. Will that cause business labor costs to rise? Probably, but not necessarily a whole lot. Productivity will likely rise about 1.5% to 2% this year so labor costs should be mostly offset by additional worker output. But we may see unit labor costs look a lot less positive for businesses than they have been the case for a decade.