Spin Continues — This Time It's the Productivity Numbers

Friday, 09 May 2008 02:35 PM

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You can tell that Wall Street is yearning for a resumption of the bull market when it tries to spin a so-so economic report into proof that the slowdown is over.

The U.S. Department of Labor reported that non-farm business productivity rose 3.2 percent in the first quarter from the same period a year ago, while unit labor costs rose only 0.2 percent. Productivity measures the number of units of a given product that an employee is able to produce per hour of work, while unit labor costs measures the cost per hour to produce those goods. Wall Street cheered the numbers as evidence that the economy is growing, yet inflation is contained.

But, those numbers fail to tell the real story concerning productivity, labor costs, and their relation to the broader economy. You see, productivity historically increases during economic slowdowns because workers become concerned about losing their jobs and work harder. Meanwhile, unit labor costs tend to fall during economic contractions as employers reduce their work forces.

So far this year, 260,000 non-farm jobs have been lost in the U.S., and inflationary pressures have continued to mount. On an annualized quarterly basis, productivity and unit labor costs rose at the same rate of 2.2 percent — certainly not indicating that inflation is contained.

The inflation-adjusted compensation of non-farm workers fell in the first three months of 2008 by the largest percentage since 1996. In other words, workers' paychecks aren't going as far as they once were due to rising prices.

This can only result in consumers tightening their pocketbooks further during the months ahead.

Payroll costs also continue to rise, which indicates that corporate profit margins will continue to decline. Despite how the financial media spins it, don't believe the hype surrounding this supposedly "positive" report on business productivity.

In light of the ongoing economic slowdown, we might see further improvements in productivity during the coming months, but those productivity gains should not be interpreted as a positive development.

Go here now if you'd like to learn more about my analysis of the financial markets and how to profit by investing in the right exchange-traded funds (ETFs) during different investment environments.

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