Explaining The US Economy’s ‘Since 1947’ Moment

In what I’d be inclined to call another blow to constructive takes on the outlook for the world’s largest economy, US productivity plunged by the most in almost 80 years during the first quarter, data out Thursday showed.

The 7.5% drop exceeded the lowest estimate from more than 40 economists. Consensus called for a 5.3% decrease.

The chart (below) is remarkable — this was a “since the 40s” print.

For those unfamiliar, this is just output per hour — output divided by hours worked. It’s usually volatile, and drawing conclusions about the impact of the pandemic on trends in labor productivity will be a fool’s errand for the foreseeable future.

The point, then, isn’t to sensationalize the “since 1947” print (although I’ll concede the temptation to use it as a headline was too great to resist), but rather to contextualize it.

Notwithstanding caveats, US economic growth was negative in Q1. Nonfarm business output likewise shrank (figure below).

Slower (or negative) growth alongside robust hiring puts downward pressure on productivity. Hours worked jumped 5.5% in Q1, Thursday’s data showed.

When you juxtapose plunging productivity with surging wages and comp, you end up with soaring unit labor costs. Sure enough, they (unit labor costs) jumped nearly 12% in Q1.

Note that the four-quarter increase, 7.2%, was the largest in almost 40 years (figure below).

Again, this is just basic arithmetic: The result of rising hourly labor costs alongside falling productivity. It reinforces sundry wage-price spiral narratives and, on an even less generous interpretation, stagflation concerns.

The read-through for the Fed is straightforward. Or at least they’ll perceive it as such. Inflation isn’t just due to exogenous phenomena and bad luck. To channel an old horror movie cliché, “The call is coming from inside the house!”

Meanwhile, jobless claims rose to the highest since February, albeit while remaining near historic lows, and Challenger job cuts posted the first YoY increase in some 16 months.

“Job cut plans appear to be on the rise, particularly as companies assess market conditions, inflationary risks and capital spending,” Andrew Challenger, the firm’s senior vice president, said, in a statement. “Despite this, job openings are still at record highs. Workers who are being cut will have lots of opportunities and will likely land quickly,” he added.

All of that on the heels of an ADP report that showed small businesses shed 120,000 jobs in April, as “mom and pop” apparently found it difficult to keep up with surging labor costs.