This is because for the past 10 years, the rate of productivity has grown more than the country’s growth rate, in direct contradiction to the historical relationship that puts productivity 1.00% below GDP. This means that workers are doing more with the same amount of hours; something good for keeping inflation low, although not so good for us.
Why is this good for keeping inflation low? Because a surplus in productivity makes labor relatively “cheap” and employers can hire more workers with little impact on wages. Please read my economic commentary below for more information. Have a good week!
Source: Bloomberg L.P. Chart by the Fixed Income Strategies Group RBC Wealth Management
The Treasury market is trading higher in the short and intermediate range, and lower in the long end this morning as investors react to the Jobless Claims number and the stronger than expected rate of Nonfarm Productivity. Both 2-year note and 5-year notes have gained 1/32 to yield 0.84% and 2.28% respectively. Meanwhile, the 10-year Treasury is trading flat yielding 3.54%. The 30-year Treasury bond has somewhat recovered from earlier losses and is now only 2/32 lower to yield 4.39%. This morning the Department of Labor released this morning its weekly Initial Jobless Claims report, showing that first time claims fell 7,000 from a week ago but were still slightly higher than expected at 444,000 versus analyst’s estimates of a 440,000 increase. However, the Continuing Claims report showed a slightly lower than expected reading at 4.594 million versus the expected 4.610 million. The less volatile 4-week average number of Initial Claims also dropped below the 460K mark at 458,500. This is a decrease of 4,750 from the previous period. Market participants will now wait for tomorrow’s release of April’s unemployment Rate where analysts estimate the level will remain at 9.70%
Additionally, the Nonfarm Productivity report, which measures the changes in productivity for the first quarter of this year beat analysts’ forecasts at 3.60% versus the estimate increase of 2.60%; the previous quarter was downwardly revised to 6.30% from 6.90%. This slowdown in productivity was partially attributed to a continuing gain in employee hours at 0.80% for the period, the first since Q2 2007 as well as a jump in compensation per hour (1.90% QoQ). Unit labor costs, which measures labor costs per unit of output, was also released this morning with a sharper than expected drop of -1.60% for the same period versus the expected -0.70% change.
The recent report shows Nonfarm Productivity beating expectations and still above the GDP rate which has been the average scenario in the recent past. In fact, the Nonfarm Productivity / GDP spread has averaged positively for the past 10 years (at 1.07%) compared to the historical -0.98% average. This surplus in productivity makes labor relatively cheap; an argument against inflationary concerns as it means employers could hire more workers with little impact on wages.
Source: Bloomberg L.P. Chart by the Fixed Income Strategies Group RBC Wealth Management
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