Data released on Tuesday in the US showed productivity growth slowed during the second quarter, “but the rapid shifts in the industry composition of activity over the pandemic continue to muddle the trend”, explain analysts at Wells Fargo. They point out unit labor cost growth remained tame on an aggregate basis, which should help to limit the upward pressure on inflation stemming from the recent pop in wages.
“Nonfarm labor productivity grew at a 2.3% annualized pace in the second quarter. That marked a slowdown from Q1 and on a year-ago basis, as the economy’s spring reopening began to benefit more labor-intensive industries like leisure & hospitality. To that end, the aggregate read on labor productivity continues to be muddled by the effects of significant compositional shifts in the economy since the outbreak of COVID and does not yet offer a clear picture of what has happened on the productivity front within industries beyond the usual post-recession bounce.”
“For now, productivity growth is sufficiently strong to keep wage pressures from bleeding significantly into inflation, at least on an aggregate basis. While compensation costs advanced at a 3.3% annualized rate, unit labor costs rose at a 1.0% pace and are essentially flat over the past year. However, the trend in unit labor costs, remains fairly strong for this stage of the cycle, and will bear close watching as the probability of strong wage growth ahead remains elevated.”