Americans are working hard, productivity data released on Friday showed, but the data might well be a leading indicator of economic distress.
Nonfarm productivity increased at an annual rate of 2.2% in the second quarter, which less than the 2.7% gain expected by economists polled by Thomson Financial, but still a strong showing.
"They're generally pretty good numbers," said David Wyss, chief economist at Standard and Poor's, "just a little softer than expectations, but we like to look at these on a four-quarter basis, it for that it was darn good."
The 2.2% increase reflected a 1.7% jump in output and a 0.5% decline in hours worked.
That is the twist.
"Remember," said Joe LaVorgna, chief economist at Deutsche Bank, "productivity is calculated by dividing output by the aggregate of hours worked in a specific period. As such, if employers are quick to lay off workers when activity slows, productivity can still look solid even though the economy is sputtering."
Wyss more or less noted the same thing. "While these numbers are good, they're also fairly typical for the early stages of a recession," he said.
U.S. employment has indeed been weak in recent months, with July showing special pressure on younger workers. (See "Summertime Blues.")
Unit labor costs rose 1.3% as expected, down from the 2.5% increase in unit labor costs in the prior quarter. Wyss was pleased to see that there was not a lot of evidence of any pressure on labor costs.
Over the last four quarters productivity is up 2.8%, and unit labor costs are up 1.5%. That means the cost to employers of their workers trails that of consumer price inflation signifcantly. The Consumer Price Index for June was up 5.0% from the level the previous year. (See "U.S. Inflation Heats Up.")
But in the manufacturing sector, productivity fell at a 1.4% annual pace in the second quarter, as output dropped faster than hours worked. Unit labor costs for manufacturers rose 6.1% in the quarter, the largest increase seen since the fourth quarter of 2006.
Financial markets did not show much direct reaction to the data. The yield on the 10-year government bond edged up to 3.95% from 3.93% late on Friday. More interesting was the dollar, which has been surging in recent weeks, though that may be more a reflection of expected slack in Europe's economy than enthusiasm about America's. (See "Investors Pile Back Into The Dollar.")
Stock prices surged, but the catalyst was a decline in oil prices, along with the strong dollar. (See "Crude's Pain Is Wall Street's Gain.")
END Related: 1. Video: Bernanke Recession Talk Hits Market Late An afternoon fade pushed Wall Street to a negative finish after two days of gains. 2. George Soros On Recession The powerful investor explains why he thinks the markets are disoriented today.
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