US Economic Update

US productivity growth stalls

Productivity in the non-farm business sector was unchanged in the third quarter, disappointing market forecasts for a 1% increase. Second-quarter productivity was revised lower to show a 1.2% increase compared to the previously reported 1.6% rise.

Unit labour costs increased at a 3.8% rate, above the consensus forecast of3.4%, and modestly slower than the rapid 9% and 5.4% (revised) rates posted in the first and second quarters of 2006.  The continued strong pace of increase in unit labour costshighlights that inflation pressures are present and will exert modest downward pressure on bonds and lend marginal support to the currency.

Productivity was unchanged relative to the second quarter as both output and hours increased at a 1.6% pace. In the manufacturing sector, productivity increased at a 5.9% pace with hours worked falling at a 1.6% rate while output increased by 4.2%.

Hourly compensation in the non-farm business sectorincreased at a 3.7% rate in the quarter, slower than the 6.6% rise in the second quarter. While compensation costs continued to rise at a decent clip in nominal terms, after taking account of inflation, real hourly compensation increased at a more moderate 0.7% pace, down from the second quarter’s 1.6% rate.

The larger-than-expected rise in unit labour costs makes the fifth consecutive quarter of hefty increases, indicating that inflationary pressures remain. Today’s report suggests that the recent increases in the core PCE deflator and core inflation rate will persist and supports our call that, even as the economy slows, the measures of core inflation will remain elevated in the near-term, keeping the Fed on hold.

Big jump in US initial jobless claims

Jobless claims rose to 327,000 in the week ending October 28. Claims in the previous week were revised up to 309,000 from 308,000.  The much larger-than-expected weekly increase in claims (market consensus: increase to 310,000) is likely to be bond positive, dollar negative.

The less volatile four-week moving average rose to 311,250 from a slightly upwardly revised 305,500 (previous: 305,250). Although there was an increase in the level of claims, its four-week moving average remains relatively low by historical standards.  Also, the unemployment rate currently stands at a low matched by May and June of this year, which were already lows not seen since 2001. 

In addition, yesterday’s release of the ISM index for October showed an increase in its employment sub-component and the ADP employment report bested expectations.  Hence, there are still signs that the labour market remains in decent shape.  With wages still growing at a good pace and the healthy state of household balance sheets, we expect that consumer spending be decently supported going forward.