Via Stephen Stanley at Amherst Pierpont Securities:
The productivity, compensation, and unit labor costs readings for the nonfarm business sector in Q4 were exactly unrevised. Productivity increased at a 1.3% annualized pace, leaving the Q4/Q4 rise unrevised at 1.0% for 2016 (and the average pace since 2011 also held steady at 0.6%). Hourly compensation was also unrevised for the quarter at 3.0%, as was unit labor costs at +1.7%. There were small revisions to Q3, as productivity was shaved to 3.3% annualized, while compensation and unit labor costs were revised upward by half a percent each. For the four quarters of 2016, hourly compensation advanced by 3.0% and unit labor costs increased by 2.0%, the third year in a row that unit labor costs advanced faster than overall price inflation.
So, the bottom line is that productivity remained on a weak (though somewhat improved) trajectory last year. I do believe that the right combination of policies (regulatory relief, marginal tax rate cuts, a well-conceived corporate tax reform, etc.) would boost the underlying trend of productivity growth, perhaps by a half a percent or more. Meanwhile, hourly compensation figures at 3% for last year corroborate the tightness of labor markets. The rise in unit labor costs (2.7% in 2014, 2.7% in 2015, and 2.0% last year) indicate that wage gains are already exerting modest upward pressure on prices at the margin.
I also wanted to comment briefly on the blowout ADP figure. ADP reported a 298K projection for private payroll gains for February. The release noted that net hiring was strong practically across the board, with some part of the spurt reflecting unusually mild weather during the period. I hope it is well known by all at this point that I am not a big believer in the ADP’s predictive powers, but, as with consumer confidence surveys, sometimes the proxies for labor market conditions are all picking up the same shift in underlying conditions. I noticed this morning that LinkedIn has also begun to release a monthly employment report, and they too noted considerable strength in the first two months of the year. Their explanation rings true in my view: they believe that the post-election surge in business confidence has led to a significant boost in hiring. This jump in payrolls may not be sustainable over a longer period, but for now, it seems pretty real. After an above-trend payroll gain in January (which I thought reflected in part a catch-up for soft readings in late 2016), I expect another robust gain in February. I have a +200K projection, and I’ll be sticking to that number, but I wouldn’t be surprised if the “whisper number” leapfrogs my forecast. In any case, I expect another strong employment report on Friday, removing the final possible obstacle to the Fed’s newfound resolve to raise rates in March and suggesting that, even with a move this month, the Fed remains well behind the curve.