US DATA: Productivity Just Strong Enough To Subdue Labor Inflation Impact (2/2)

Large revisions are a constant theme in the productivity/ULC series, so they are best considered in terms of longer-term trends.

• In 2024, nonfarm business productivity rose 2.3% on an annual average basis (output up 2.9%, hours worked up 0.6%), with ULCs up 2.6% (5.0% rise in hourly compensation, 2.3% rise in productivity). The table below shows that while productivity picked back up in 2024 to a 4-year high, offsetting a 3-year high for hourly compensation.
• The 5-year average for productivity growth is 2.0%, while hourly compensation rose 5.1%, which means unit labor costs have risen by 3.1%.
• Of course the picture of recent history could be altered radically by the benchmark revisions to the BLS employment data out Friday, because the expected drop in the level of employment to early 2024 would mechanically increase the implied growth in productivity. We will get confirmation of this in the productivity revisions due March 6.
• As it stands, from the perspective of the 2% inflation target, with productivity remaining at 2.0%, wage growth of 4% would be consistent with hitting the target.
• Wage growth is close to that now: the Q4 Employment Cost Index was 3.6% Q/Q annualized in Q4 2024, with average hourly earnings up 4.3% annualized at the end of last year (3.9% Y/Y).
• A slowdown in productivity to 1.5-2.0% - where landed in Q4 2024 - is probably too low to be consistent with bringing inflation down to the 2% target, and a recent uptick in AHE and ECI on an annualized basis bears attention.
• But the longer-term view (let alone prospects of a pickup in productivity amid advancements like AI) will probably keep Fed policymakers at least cautiously optimistic on the labor market's impact on inflation - even before potential upward productivity revisions.