Download (Y/L) +

Productivity and Costs
(Measure of Changes in Worker Efficiency)
Web address:
Revisions can be substantial
Productivity – output of goods/services per labor hour. Measures how firms are using their employees and physical capital (land, materials, equipment). Most
important determinant of economy’s long-term health and prosperity. Higher productivity keeps inflation, DP/P, in check. Track non-farm business sector
productivity for best reading on Y. (75% of GDP)
Productivity Growth and a Virtuous Cycle:
 productivity (Y/L) =>  economic growth (DY/Y) without inflation (DP/P). Falling ULC
=>  exports (X),  household wages/income,  corporate profits,  dividends, =>  business investment spending, =>  (Y/L)
The Business Cycle and Productivity Swings (cyclical productivity growth, %D(Y/L))
Economic slowdown:  spending =>  production (Y) =>  (Y/L)
Recession:  labor (L) =>  (Y/L)
Recovery:  production (Y) =>  (Y/L)
Expansion:  labor (L) =>  (Y/L)
The Productivity/Unemployment Relationship:  (Y/L) =>  profits =>  Investments => new business =>  employment
3 Major Components: %D W = %D (Y/L) + %D (WL)Y
1. Output Per Hour (Y/L): Productivity measures labor efficiency. Labor productivity is a leading indicator of inflation (DP/P). Productivity growth helps determine
economic speed limit. Maximum sustainable economic growth rate = productivity growth + labor force growth
2. Compensation Per Hour (W): average hourly compensation rate. Provides clues on emerging wage pressures. Compensation = wages, salaries, bonuses,
commissions, value of employment paid benefits (health costs, social security funds, private pensions).
Compare compensation growth to productivity
growth.
3. Unit Labor Costs (WL/Y): Labor costs to produce a single unit of output. Excellent indicator of business labor costs. Link between compensation per hour and
output per hour. W = Y/L x (WL)/Y. Labor costs equal 2/3 of all business expenses. Close statistical relationship between ULC and CPI.
 ULC => DP/P and  profits. P = PY –WL.  P/Y = P – (WL)/Y
If productivity growth > compensation growth =>  ULC =>  profits,  inflation,  wages,  stock prices,  living standards
If compensation growth > productivity growth =>  ULC =>  DP/P
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Market Analysis:
Bonds:  %D(Y/L) and DW/W => (DP/P)Et+1=>  DBonds =>  iBonds
Stocks:  (Y/L) =>  (WL)/Y, (ULC) =>  profits =>  PStocks
Dollar:  Y/L =>  U.S. global competitive position => [DP/P U.S./DP/PROW] => X, M =>dollar
Labor Productivity, Compensation and Costs
(Nonfarm Business)
(% chg from year ago)
9%
9%
4th Quarter 2012 (SAAR)
2.4%
=
4.5%
+
= -2.1
Compensation = Labor Costs per Output + Output per Hour
8%
7%
8%
7%
6.1%
5.6%
6%
5.0%
4.9%
4.7%
4.6%
5% 4.5%
4.3%
4.2%
3.6%
3.7%
3.5%
3.4%
4%
3.2%
3.1%
3.1%
3.0%
2.9%
2.9%
2.7%
2.6%
2.5%
2.5%
3% 2.3%
2.2%
1.9%
1.9%
1.9%
1.8%
1.8%
1.6%
1.6%1.5%
1.5% 1.7%
2%
1.3%1.1% 1.1%
1.2%
1.1% 1.0%
0.9%
0.8%0.9%
0.7% 0.6% 0.6%
1%
0.4%
0.2%
0.1%0.2%
0%
-1%
6%
5%
4%
3%
2%
1%
0%
00
01
02
03
04
05
-4%
Source: Bureau of Labor Statistics
07
08
09
-1.1%
-2%
-3%
06
Productivity
Hourly Compensation
Unit Labor Costs
10
11
12
13
-1%
-2%
-3%
-4%
P = PY – wL
Productivity = Y/L
 Y/L =>  P
 P =>  P
Wage Growth Rate Analysis
DW/W = %D (Y/L) + (DP/P)
2002-2003, U.R. > 5%
4% = 4% + 0%
Wage growth compensated for productivity but not the 2.2% inflation
2005-2006, U.R. < 5%
4.5% = 2.5% + 2%
Wage growth compensated for productivity, and part of 3.5% inflation
Circular-Flow Diagram
Government purchases of
goods and services
Government borrowing
Government
Consumer
spending
Government
transfers
Taxes
Private savings
Households
Wages, profit,
interest, rent
Factor Markets
Wages, profit,
interest, rent
GDP
Investment
Firms
Borrowing and stock
issues by firms
Foreign borrowing
and sales of stock
Exports
Rest of the world
Imports
Foreign lending and
purchases of stock
Financial Markets
Interest Rates and Recessions
1988-2012
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Recession
Baa
Fed Funds
10-yr Treas
Inflation Expectations
2003-2012
6
6
Inflation Expectations
10-yr Treas
TIPS (10-Yr)
5
5
4
4
3
3
2
2
1
1
0
0
03
04
05
06
07
08
09
10
-1
11
12
13
-1
Source: Federal Reserve
Business Fixed Investment
(Nonresidential Structures)
40
28
24
30
22
19
18
16
20
-10
-20
11
7
2
0
21
10
8
0 0 Q 1 0 1Q 1
2
0
0 2 Q 1 0 3 Q 1- 10
- 24- 2Q 1
-4
-6
- 11
9
8
5 4
12
30
13
13
10
40
35
1
0 5Q
- 21 0 6 Q 1 0 7Q 1
-8
9
1
20
13
11
10
10
0 8 Q1 0 9 Q1
-4
10 Q 1 11Q 1
-2
12 Q 1
0
-1
-10
- 10
-20
- 17
- 2- 02 0
-30
-33
-23
-27
-29
- 3-13 1
-30
-28
-40
-40
-50
-50
Annualized Quarter Growth Rate
% Change From Quarter One Year Ago
7
Housing Starts & Building Permits
(Measure of Current and Future Housing Construction)
Web: www.census.gov/const/www/newresconstindex.html
Housing starts has revisiosn for preceding 2 months, permits for preceding one month. Seasonal adjustment changes made in April for past 2 years.
Housing starts and permits are very effective and reliable leading indicators of future economic activity. Both are useful forecasting tools. Census Bureau surveys
builders in 19,000 localities across the county during the first 2 weeks of each month. Housing starts are seasonally adjusted but extreme weather
conditions can make data extremely volatile. So monitor data over 3-4 month period to detect underlying trend.
Housing starts are a function of interest rates, real personal income growth, consumer confidence, and tax legislation (builder tax breaks, mortgage interest payment
deductions)
Housing is a very interest rate sensitive market.
 interest rates =>  housing demand =>  housing starts
 interest rates =>  builders demand for construction loans
Housing has a large “multiplier effect” on the economy and is a major swing industry.
 housing construction =>  many other sectors ( steel, wood, electricity, glass, plastic, wiring, piping, concrete). House ground breaking to completion typically
takes 6 months.
A vibrant home selling market =>  sales of furniture, carpets, home electronics and appliances.
3 Housing Starts Categories:
Single Family homes – 75% of total home building (reliable economic indicator)
2-4 unit apartments – 5% of market (townhouse or small condos)
> 5 unit structures – 25% of residential housing starts (apartment buildings) 50 unit apartment = 50 starts
Housing starts > 2 million may lead to shortages of supplies and skilled workers
Housing starts between 1.5-2 million indicates healthy home construction industry
Housing starts < 1 million leads to an economic slowdown
Housing permits – Builders in most U.S. localities must file a permit and receive authorization in advance of construction.
Permits lead housing starts by 1-3 months and is one of the 10 components of the Index of Leading Economic Indicators
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Market Analysis:
Bonds: If housing starts  & Y > YPot =>  DP/P =>  DBonds =>  iBonds
Stocks: If housing starts  =>  DY/Y =>  profits =>  PStocks
Dollar: Housing starts  =>  DY/Y =>  profits and iBonds =>  dollar
Single Family Housing Starts & Building Pe rmits
2000
2000
1800
1800
1600
1600
1400
1400
1200
1200
1000
1000
800
800
600
600
400
400
200
200
95 96
97 98 99 00 01
Thousands
Thousands
(seasonally adjusted annual rate)
02 03 04 05 06 07 08 09 10 11 12 13
Starts
Re ce ssi on
Bui l di ng Pe rmi ts