Another Look at Productivity & Labor Costs

Today the Bureau of Labor Statistics released its look at Second Quarter 2019 Productivity and Costs.  The report prompted the question if the US is more productive, but at a cost.

In short, yes, we're more productive but it costs more.

In long, yes, but only for now, and for the wrong reason:

(1) Productivity--in this sense--is a function of aggregate output per aggregate number of hours worked.  Therefore, it's a key source of economic growth, as the strong correlation on the graph below demonstrates (r = +0.677 since 1951).  The BLS blurb says output rose 1.9%, but the hours worked shrank -0.4%.  So, we collectively did/made more in less time, resulting in productivity rising 2.3%.

Many economists (sorry, Keynesians) say that over the long term, GDP growth is only possible through productivity growth.

(2) Unit labor cost is just labor per unit of output produced.  BLS says it's the ratio of hourly compensation to labor productivity.  So naturally, it shows a negative correlation with productivity over the long term, like on the graph below (r = -0.677 since 1951).

This negative relationship implies productivity and unit labor costs tend not to rise with one another, unlike what's reported in today's BLS release.  The productivity growth may be due more to declining hours rather than improved output as GDP growth stalls. Want more on this topic?  Contact us to discuss.

 

Market Musings as of August 16, 2019

Below are snapshots of the latest bullish and bearish factors driving the cotton market.  Please contact Gary Raines @ gary@redskyeconomics.com or 615-713-1153 for more.

Bulls

-              Lubbock-area cotton reached 103°, 104°, 105°, and 102° Friday, Saturday, Sunday, and Monday, the hottest so far this year, effectively shutting down plant development over the weekend.  The region has also been rain-free for two weeks.  As a result, 72.52% of Texas is abnormally dry or in drought, the highest share in nearly a year.  What's more, cotton areas across W Texas are likely to remain mostly dry over the next week, crimping yield prospects;

-              With the Aussie planting season only a few weeks away, drought continues over key cotton areas and regional irrigation supplies are reported to be very low, curbing planting intentions;

 

 

 

 

-              In ~5% of the Indian state of Maharashtra pink bollworm infestation on cotton has crossed the “economic threshold limit”, when the value of the damaged crop exceeds the cost of controlling the pest, suggesting a limited harvest;

-              US cotton exports jumped last week to ~367k bales, the biggest mid-August volume on record, primarily owing to robust shipments to Vietnam, also the biggest mid-August volume on record to this destination.  As a result, early marketing YTD cumulative exports are off to their biggest start since 2008/09, boding well for big exports in 2019/20;

-              Cert stocks were flat or lower Thursday for the 41st straight weekday, sliding to their lowest in eleven months...a modest bull.

 

 

 

Bears

-              As of this weekend, 20% of the US cotton crop was at/beyond boll opening, the highest mid-August share on record, suggesting rapid accumulation of heat-degree days that bodes well for above-trend yields;

 

 

 

-              The WASDE was decidedly bearish for cotton, reflecting higher 19/20 US production and ending stocks forecasts, coupled with sharply lower 19/20 world mill use & sharply higher ending stocks projections;

 

 

 

 

-              Corn saw limit losses following the WASDE, weighing on other ags...cattle, soybean, cotton, etc.;

 

-              Net sales to China turned negative on the latest export report.  Net sales reductions last week of Pima also were the biggest since November;

 

 

 

-              SE US cotton areas will see improved rainfall chances from M-W next week;

 

 

-              The rebound on the ICE this week relieved oversold conditions.  Not bearish per se, but certainly relieved last week's bullish tendency for a bounce;

 

 

-              Chinese industrial production grew at the weakest rate in 17 years in July and retail sales disappointed;

 

 

-              Growth in European GDP slowed further in the second quarter.  In particular, the German economy--the biggest in Europe--shrank in the second quarter.  As a result, nine major economies are in/near recession--Germany, the UK, Italy, Mexico, Brazil, Argentina, Singapore, South Korea, & Russia;

 

 

-              While overall US retail sales grew a seasonally adjusted 3.4% y/y in July, sales at clothing & accessories stores shrank -2.4%, the third straight month of losses.  YTD sales in this retail sub-sector are now off -0.5%;

 

 

-              Argentina just suffered the 2nd-biggest crash since 1950 for any stock market--and the nation is again on the brink of a financial crisis.  Not a big bear, but certainly not bullish;

-              US industrial production grew a slower-than-expected 0.5% YoY in July, the weakest in 2.5 years...hinting at more economic weakness in 3Q & 4Q;

 

 

-              I've noted for months that the 3mo/10yr yield curve has been inverted.  Wednesday the 2yr/10yr curve inverted for the first time since 2005, another harbinger of eventual recession.  In fact, the 2/10 curve has preceded every recession in modern history;

 

 

-              Thursday China vowed countermeasures against the US over the Sept/Dec tariff hikes, signaling a protracted trade battle.  So far, how China plans to retaliate has not been revealed, and there are no trade meetings scheduled until October at the earliest;

-              Plus-size apparel retailer Avenue announced Wednesday it will close all 222 locations across 33 states, including two in NC...a modest bear;

-              A'gaci, a women's clothing chain based in San Antonio, also announced late last week that it was going out of business and closing all its 54 stores...another modest bear.

 

 

Other Notables

-              July was the hottest month on Earth since records began 140 years ago, NOAA confirmed.  Nine of the 10 hottest Julys on record have occurred since 2005 and last month was the 43rd consecutive July above the 20th century average.  While China averaged near- to cooler-than-average temps for the month, North America, Africa, Asia, Oceania, the Caribbean region, the Hawaiian region, and the Gulf of Mexico had a July temperature that ranked among the ten warmest Julys on record;

-              The Atlantic Basin remains relatively quiet with no tropical storm formation on the horizon.  But peak hurricane season isn't until ~mid-September;

-              The August U. Michigan Consumer Sentiment Survey is due for release at 10 ET today;

-              China's State Reserve is due to conclude its latest round of daily cotton auctions in September.  Since early March 682,885 MT (3.14 mb) have been auctioned, about 85% of the offered volume;

-              In response to stalling growth, Mexico cut interest rates Thursday for the first time in five years, hinting at weakness ahead for the peso.