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Slumping US productivity drives surging labour costs

Reade Pickert

US productivity slumped for a second straight quarter as the economy shrank, driving another surge in labour costs.

Productivity, or nonfarm business employee output per hour, decreased at a 4.6% annual rate in the second quarter after falling 7.4% in the previous three months, US department of labour figures showed.

That marked the weakest back-to-back readings in data since 1947. On a year-on-year basis, output per hour fell by the most on record.

With the drop in productivity, unit labour costs jumped at a 10.8% rate in the second quarter from the previous three months. The increase from a year earlier was the biggest since 1982.

Labour costs are the biggest expense for many businesses, so firms often adopt new technologies and upgrade equipment to make their workers more productive, helping to blunt the inflationary effect of higher wages.

However, labour costs are outstripping the central bank’s inflation goal by nearly five times on an annual basis, suggesting sustained upward pressure on prices and ultimately making the US Federal Reserve’s inflation fight more difficult.

The unemployment rate has fallen back to its prepandemic level of 3.5% — matching a fivedecade low — and job openings outnumber the unemployed by nearly two to one. Competition for workers has fuelled a jump in wages across industries, especially among lower-income workers. But while hourly compensation rose in the quarter, it fell 4.4% on an inflation-adjusted basis, Tuesday’s data showed.

The jobs market is a bright spot in an otherwise darkening economic picture. Decades-high inflation has weighed on consumer spending and prompted aggressive monetary policy action by the Fed to curb it.

Data out on Wednesday is expected to show that a gauge of consumer price inflation has decelerated in July amid falling petrol costs. Stripping out food and energy, annual inflation is likely to have accelerated, underscoring the breadth of price pressures in the economy.

While productivity growth rates can be extremely volatile in normal business cycles, the pandemic and subsequent recovery over the past two years have made the figures even more prone to big fluctuations. It is likely to take some time to establish the underlying trend in productivity in the wake of the pandemic, but if it has permanently downshifted, there could be lasting repercussions for the wellbeing of the US economy in the long run.

Nonfarm business output as measured by this report, which is about 75% of GDP, dropped 2.1%. The economy, as measured by GDP, shrank for a second straight quarter as decades-high inflation undercut consumer spending and Fed interest rate hikes stymied businesses and housing.

Hours worked, the other input in productivity calculations, climbed 2.6% — half the pace of the previous quarter.

INTERNATIONAL BUSINESS

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2022-08-10T07:00:00.0000000Z

2022-08-10T07:00:00.0000000Z

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