Chart Of The Day: Productivity Not Pointing Towards Recovery
I penned yesterday that:
This data hardly suggests that the economy is ready to turn on its heels and begin a race higher toward the expectations of 3.5% economic growth by the end of 2013. The boosts to the economic data that we have seen as of late have been driven by one time anomalies which are hardly supportive of longer term economic advances.
While the effects of the massive liquidity injections by the Fed over the months ahead will likely stabilize economic growth in the short term - QE programs have shown little ability to actually affect employment or economic growth. For now the economy remains weak. While GDP from the last quarter of 2012 will very likely be revised higher in the months ahead due the various economic anomalies - the impact of higher taxes and a weaker consumer will likely make that bump fairly short lived.
The most recent release of productivity, and labor costs, support the view that the economy is likely much weaker than current expectations suggest.
For the fourth quarter of 2012 productivity declined for the first time since 2011 reflecting weakness in output with nonfarm business productivity falling 2% annually. This followed a gain of 3.2% in the third quarter which was partially due to the suspicious bump in defense spending. Unit labor costs, a negative to corporate profitability, jumped at an annualized 4.5% rate following a 2.3% decrease in the third quarter.
The large jump in unit labor costs is directly attributable to businesses rushing to pay out special dividends and bonuses prior to the impact of the "fiscal cliff" and the threat of higher taxes. For the fourth quarter compensation jumped 2.4%. There will likely be a sharp reversion in unit labor costs in the first quarter of 2013.
The chart of the day shows the relationship between productivity, capacity utilization, employment and the economy.
What can be clearly seen is that just prior to each recession, going back to 1969, the growth rate of capacity utilization has peaked and turned lower. Furthermore, while productivity weakened in the last report more than expected, the trend of productivity has been decidedly negative since it peaked in late 2009. This is a primary reason why we are not seeing a real increase in employment as employers are likely optimized for current demand levels. As I pointed out in my discussion on employment:
The last bit of information explains why the employment-to-population ratio, and labor force participation rates, has not improved since the recessionary lows. This is more clearly evident when looking at the number of full-time employees (which are required to have a healthy consumption based economy) relative to the population. The dashed line in the chart below is jobless claims on an inverted scale. What can be surmised from this analysis is that jobless claims are not necessarily falling due to companies ramping up hiring but rather an exhaustion of layoffs and terminations
In other words companies have cut employment to a level where there is equilibrium with demand. Any increase in demand has been filled with temporary hires which is why the number of people "working part time for economic reasons" remains elevated.
The productivity and costs report is not pretty and doesn't support the exuberant calls for a surge in economic activity in the near term. While there were several "special factors" in the most recent report - the trend of the data clearly shows a deceleration in activity. The one bright spot of weaker economic data in the next couple of months will be a reduction in "labor costs" which will be viewed as a positive by economists; however, for main street a reduction in labor costs means a smaller paycheck.
While sentiment has surged to very extreme levels as the markets have rallied it has been primarily due to the Federal Reserve induced liquidity injections as opposed to structural improvement in the underlying economics.