Unit Labor Costs Falling Again In US

The Bureau of Labor Statistics reported Wednesday that unit labor costs fell 0.9% in Q2, and are up 1.9% from a year earlier. Unit labor costs are a drag on the Federal Reserve’s 2.0% PCE inflation target.

Not only that, but unit labor costs are now up only 7.8% from nearly 10 years ago.

The 2010s are not the 1990s, that now-forgotten Alan Greenspan-epic of low inflation and high productivity growth.

However, it makes sense that the captains of industry invest in new plant and equipment when they think sales are forthcoming to validate the risk.

True, the last 10 years have been the slowest economic recovery on record, and by many reasonable accounts the US never regained a lot of lost ground—that is, after 2008 the US set off on a lower growth trajectory than ever seen before.

This post-2008 economic perma-dud was quickly embraced in some circles as the new norm, but at long last there are signs of life in labor markets and productivity. For example, output per hour rose at a 2.9% annual rate in Q2.

If that 2.9% rate of rate of productivity can be maintained, then given the seemingly chronic meager wage gains that characterize the US, unit labor costs will continue to be a drag on the Federal Reserve’s 2% IT.

It seems reasonable that maintaining aggregate demand is vital to underwriting business investment. Thus, a central bank that embraces NGDPLT will probably enjoy the most success.


The old truism is that a nation cannot print money to create prosperity.

But we know from the Great Depression and the Great Recession that too-tight money can cause deep long-term declines in real output, along with a lot of human havoc. If one posits that an economy can only grow so much from its prior-year base, then declines in real output also have nearly permanent ramifications.

In recent years, independent central banks have become increasingly squeamish about even minute rates of inflation.  As recorded in FOMC minutes, before and during 2008, the word “inflation” showed up literally thousands of times, as if a confederacy of monomaniacs controlled Federal Reserve.

With assets fully priced in the US, investors need to keep a wary eye on the Fed. It has an inclination to over-tightening.


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