Inflation and wages are the missing pieces for the Fed
A deeper look into the Q2 US non-farm productivity report highlights that many of the Fed's concerns are even worse than believed. The current quarter's 0.5% annualized contraction in productivity fell far short of the +0.4% expected but what really hits hard are the benchmark revisions.
For some perspective:
- 2014 productivity +0.8%
- 2015 productivity +0.9%
- Productivity over the past 12 months -0.4%
Perhaps more than any single metric, productivity is the measure of how dynamic an economy is. In the late 1990s, productivity was growing by more than 3% and although the pace of technological innovation has slowed, it's still impressive.
On unit labor costs, the Fed had been optimistic about some signs of higher wages but that's been dashed. Through Q1, labor costs had been up 3.0%. After revisions and the latest data, costs are up just 2.1% in the 12 months since the end of Q2. The 2015 gain was also revised down to 2.0% from 2.3%.
The Fed still believes that jobs growth is going to push wages higher but the latest figures show the US is even further from the inflation future the Fed wants and that a significant growth pickup is more challenging than believed.
