This morning’s news that productivity unexpectedly evaporated in the third quarter is bad news that comes at a vulnerable point in the economic cycle. With core inflation and labor costs creeping up, this isn’t the ideal moment to learn that productivity is missing in action.
But missing it is. The Bureau of Labor Statistics today reported that non-farm business-sector labor productivity was one large goose egg during July through September. Zero. Zilch. That’s down from 1.2% in the second quarter and 4.3% in the first. The consensus outlook was looking for something around 1%-plus.
The overall trend doesn’t bode well for remaining optimistic about inflation, at least for the near term. About two-thirds of the cost of manufacturing goods or delivering services is tied to labor costs. As a result, lower productivity (or the 60-minute output of one worker) raises business costs. Lower productivity gives inflation a stronger foothold in the medium term because it raises labor costs, and firms may try to pass off the higher costs by raising prices more than they otherwise would. Or so some economists reason.
Falling productivity by itself is only one factor, of course. Alas, today’s productivity news comes on the heels of Tuesday’s report of accelerating labor costs. The Labor Department’s employment cost index jumped 1% in the third quarter, the fastest quarterly pace in more than two years.
A cut in the Fed funds target rate looks increasingly remote for the foreseeable future. The question is whether the Fed will feel compelled to raise rates when it meets next month. Once again, that depends on the numbers that come out between now and then. But if statistical salvation is coming, it needs to come soon. Monetary policy, after all, is no quick fix for bubbling inflation pressures. What Bernanke and company do today will have an effect in a year or two. The Fed can wait for more data, but it can’t wait forever. The clock, as always, is ticking, and it seems to be ticking faster with every new data update.