Immaculate Disinflation? Unit Labor Cost Growth Revised Down to 2.3% on Higher Productivity

STILLWATER, OK - JANUARY 27: A Haliburton oil field worker walks past a fracking rig January 27, 2016 near Stillwater, Oklahoma. (Photo by J Pat Carter/Getty Images)
Photo by J Pat Carter/Getty Images

U.S. labor was more productive in the third quarter of this year than previously thought, driving down labor costs and providing some slight comfort on inflation fears.

Labor productivity was unexpectedly revised up to show 0.8 percent growth in the July through September period, data from the Labor Department showed Wednesday. The preliminary estimate had productivity rising 0.3. Economists had estimated no change in the productivity figure.

Total output rose a solid 3.3 percent and hours worked increased 2.5 percent compared with the second quarter. Compared with a year ago, however, productivity was down 1.3 percent as output increased just 2.1 percent and hours worked rose 3.4 percent.

The government calculates labor productivity by dividing an index of inflation-adjusted output by an index of hours worked by everyone from employees, to business owners, to unpaid family workers. It is a measure of the output American workers produce per hour.

Unit labor costs increased 2.4 percent in the third quarter,  a large and unexpected downshift from the preliminary estimate of 3.5 percent. Hourly compensation was up 3.2 percent compared with the rise in productivity of 0.8 percent.

The unexpected revisions indicate that inflationary pressures from the labor market were still substantial but not as powerful as previously thought. The data still shows that labor costs are rising much faster than productivity, risking the economy falling into a wage-price spiral in which higher wages feed increased consumer demand that pushes prices higher, triggering workers to seek higher wages.

The idea that inflation could cool off without higher rates doing much damage to the economy has been mocked as “immaculate disinflation.” The third quarter unit labor cost and productivity numbers suggest there may be more to this idea than many have thought.




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