Date: November 1, 2018
U.S. Productivity Posts Best Back-to-Back Quarters Since 2015
Productivity gains in the U.S. posted the best back-to-back quarters since 2015, echoing a pickup in economic growth and offering some hope that faster expansion without stoking inflation is possible. The main measure of nonfarm business employee output per hour increased at a 2.2 percent annualized rate in the July-September period, a Labor Department report showed Thursday. That compared with an estimated 2.1 percent rise in Bloomberg’s survey of economists and a revised 3 percent in the previous three months. Unit labor costs rose at a 1.2 percent annualized rate, slightly above projections, following a 1 percent drop. Tepid gains in productivity in recent years have puzzled economists, who are watching to see if Republican-backed tax cuts, a tightening labor market and new technologies can finally deliver a sustained pickup. For Federal Reserve policy makers, a persistent increase in efficiency would potentially limit the need for higher interest rates. Compared with a year earlier, productivity rose 1.3 percent, the same pace as in the second quarter and equal to the average annual rate from 2007 to 2017. That’s well below the 3 percent pace of the late 1990s. A separate report on Thursday showed the labor market remains tight. Filings for unemployment benefits fell by 2,000 last week to 214,000, near the lowest level since 1969, according to Labor Department figures. The number of Americans on jobless-benefit rolls dropped during the prior week to 1.63 million, the lowest since 1973. Elsewhere in the productivity report, inflation-adjusted hourly earnings rose at a 1.4 percent annualized pace after a 0.3 percent increase, while hours worked rose 1.8 percent. Output advanced at a 4.1 percent rate, following 5 percent. Among manufacturers, productivity rose at a 0.5 percent pace after a 1.2 percent rate in the prior quarter. That compares with an annual average gain of 0.7 percent from 2007 to 2017.
BOE Hint at Faster Hikes Over Brexit Uncertainty
The Bank of England hinted there may be a need for faster interest-rate increases in the coming years in a report dominated by uncertainty over Brexit. The Monetary Policy Committee, led by Governor Mark Carney, said the economy may start running hot earlier than previously anticipated as wage growth improves and domestic costs build. It sees the inflation rate staying above its 2 percent goal for the next two years. Interest rates were left unchanged on Thursday. The pound briefly ticked higher before stabilizing to trade at $1.2920, up 1.2 percent on the day, at 1:13 p.m. London time. The slightly hawkish bias compared with August is tempered by the fact that the forecasts are based on an assumption for a smooth Brexit that may not come to pass. It said the exit deal with the EU remains the biggest factor when it comes to the economy and monetary policy. The projections also don’t take into account the U.K. government’s latest budget, announced this week, which aims to provide stimulus. “The monetary policy response to Brexit, whatever form takes, will not be automatic and could be in either direction,” the bank said in its quarterly Inflation Report. While the exact impact of Brexit “cannot be determined in advance, under all circumstances, the MPC will respond to any material change in the outlook.” In a sign of how Brexit is affecting the economy, the BOE slashed its forecast for business investment and sees stagnation this year. It also lowered its 2019 economic growth outlook slightly, to 1.7 percent. On the global economy, it said growth has become more uneven, and downside risks have increased. The U.K. predictions, including the outlook for faster inflation, are based on market measures indicating that the BOE will deliver about three more quarter-point rate hikes by late 2021, more than were foreseen a few months ago. But with its forecasts zero-weighted for a disorderly Brexit, there’s an increasing chance they will ultimately have to be thrown out. The BOE assumes a relatively stable path for the pound over the next three years, a crucial determinant for inflation. At the same time, it said the currency will probably rise if there’s a Brexit deal that keeps a close relationship with the EU, or drop if the U.K. crashes out without new trade arrangements.
China Signals More Stimulus Measures Planned
China’s leadership signaled that further stimulus measures are being planned, as disappointing economic data showed that the current piecemeal approach isn’t working. The nation’s economic situation is changing, downward pressure is increasing, and the government needs to take timely steps to counter this, according to a statement from a Politburo meeting Wednesday chaired by President Xi Jinping. The signal of increasing urgency came just hours after purchasing manager reports showed an across-the-board deterioration that risks spilling into a broader drag on global growth. The world’s second largest economy is being damaged by its trade war with the U.S. and a domestic debt cleanup. With those pressing constraints, officials have added modest policy support so far, ranging from tax cuts to regulatory relief, rather than repeating the fiscal firepower seen after a previous slowdown. Investors seem unpersuaded by the drip-feed approach with the yuan hovering around a decade low and stocks sliding. The central bank set the reference rate for the currency at 6.9670 per dollar on Thursday, slightly weaker than the day before. The onshore yuan strengthened 0.08% to 6.9681 per dollar as of 10:10 a.m. in Shanghai. “Accepting slower growth has long been a challenge for Beijing, but now the rate of slowdown is firmly out of the comfort zone,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “In recent years the balancing act has been addressing risks in the financial system against pressure to stabilize economic growth. It appears the latter is again more of a priority.” Manufacturing growth slowed to the lowest level in more than two years, and while economists had seen further tax cuts coming, few had predicted bigger stimulus for now. An export sub-gauge fell deeper into contraction territory, suggesting that an earlier export rush to beat U.S. tariff deadlines will fade sharply. Other data showed conflicting pictures for manufacturing. While output fell into contraction in October according to satellite data, a separate manufacturing gauge from IHS Markit released on Thursday ticked up in October, rising to 50.1 from 50. The new orders sub-gauge from that release also rose from September. 50 is the dividing line between expansion and contraction.