Hiring is up, but output growth grinds to a halt as productivity declines in the fourth quarter.
- Nonfarm business sector labor productivity declined at a 2.0% annual rate in the fourth quarter, the largest decrease since the first quarter of 2011.
- Growth in employee hours picked up again as the labor market gained steam.
- Nonfarm output grew by just 0.1% annualized in the fourth quarter.
- Year over year, productivity growth was 0.6%, the slowest pace in four quarters.
- Unit labor costs rose by an annualized 4.5% after two quarters of declines.
As expected, nonfarm labor productivity declined by 2.0% in the fourth quarter. Nonfarm business output grew by just 0.1% annualized, the worst showing in nearly two years, even as employee hours were up 2.2% over the previous quarter. Year on year, productivity growth was just 0.6%, the slowest pace of 2012. For 2012 overall, productivity growth was 1.0%, compared with 0.7% in 2011 and 3.1% in 2010.
After two quarters in which hiring lagged behind output growth, the tables turned in the fourth quarter. Despite all the fears over the fiscal cliff, employers added an average of 201,000 jobs per month, compared with 152,000 in the third quarter. Real GDP contracted, however, in part because of massive but temporary corrections in defense spending and inventories.
Coming out of the recession, companies slashed payrolls and worked their existing employees to the bonethis would explain the strong productivity figures we saw in 2009 (3.0%) and 2010 (3.1%). But firms have squeezed about as much as they can out of their workforces and have resorted to hiring more to raise output. Thus, productivity growth has been relatively muted over the past two years.
With fiscal concerns lingering and foreign growth issues persisting, we expect both output and hiring to trend up modestly. The expiry of the payroll tax cut and other headwinds have left further acceleration in employment growth over the next few months unlikely. But the underlying fundamentals in the economy are trending upward, and employment growth in 2013 should at least match that in 2012.
We expect a first-quarter rebound in output growth and gradual improvement thereafter. The result: productivity should grow around 0.5% in 2013 and drift up slowly, but it will be years before productivity returns to its long-term trend rate of 2%.
It would be best if everyone who knows the truth about the coming economic reality would up their FARM productivity.
IE, better get to growing something in the backyard,
because it’s all you’re going to have.