| Welcome to Schwab | Investment Products | Research & Strategies | Advice & Retirement | Active Trading | Banking & Lending |
|
| Welcome to Schwab | Investment Products | Research & Strategies | Advice & Retirement | Active Trading | Banking & Lending |
|
 Call us at 866-232-9890  Send us an email |
|
Schwab Guide to Economic Indicators: Productivity Decenber 10, 2007 What is it? It's an efficiency indicator that compares output with hours worked. Productivity figures are provided for the following on a quarterly basis:
The report is produced quarterly by the Bureau of Labor Statistics (BLS) using data provided by the Bureau of Economic Analysis (BEA), BLS and the Federal Reserve. What is its relative importance? High. Productivity is widely followed because of its impact on inflation, the growth rate of the economy and jobs. It's one of several key indicators monitored by the Federal Reserve as it sets monetary policy. What impact does it have on the market? The degree to which productivity growth meets expectations is typically one of the most influential aspects of the report.  Subpar (below expectation) readings of productivity are deemed undesirable because they imply less efficient, more costly use of labor and other resources. Bond prices typically fall (yields rise) on the outlook for potentially higher inflation and an increased chance that the Fed will hike interest rates. Stock prices may also fall. Why? A rise in bond yields can eventually make bonds more attractive once the fall in bond prices settles down. Compared to where the weights of stocks and bonds were in your portfolio, the typical thing to do in response to this change in valuation would be to sell a portion of your stock portfolio and put the proceeds into bonds. Another way of looking at subpar productivity readings is through the eyes of a corporation. If a firm is unable to offset labor costs or other expenses with productivity gains one or both of two unfavorable scenarios typically develop. Inflation can result if higher costs get passed on to the consumer in terms of higher prices. Or, profits take a hit, if the corporation absorbs the costs. Alternatively, if productivity growth exceeds forecasts, this can give a boost to stock and bond prices. Faster growth rates of productivity help reduce inflation pressures while increasing the potential growth rate of the economy, as measured by gross domestic product. Even if wages are rising, it likely won't be inflationary if it's met or exceeded by a corresponding increase in productivity. In this environment, corporate profits would theoretically improve, thereby supporting stocks. Bond prices would typically benefit based on benign inflation conditions. That said, it's important to recognize the different effects robust productivity growth has in the long term compared to the short term. On one hand, higher rates of productivity growth are considered a long-term positive regarding job creation because of its ability to raise the sustainable growth rate of the economy. More economic growth typically equates to more jobs. Such increased efficiency can be a short-term negative because of its ability to reduce the number of workers needed to produce a given amount of output. While true, this is not considered a challenge. That's because the Fed believes the long-term positive effect on job creation and the economy from robust productivity growth is greater than the short-term negative effect on employment. How is it calculated? Productivity measures output per hour. Output, or the value of finished goods and services, is adjusted for price changes. Inter-industry transactions are excluded to avoid double-counting. "For example, the output of the steel industry is excluded to the extent that it is incorporated in final products such as automobiles," the BLS said. An index is created for the resulting output figure. To obtain productivity, that output index is divided by an index of hours worked. It's computed on a seasonally adjusted basis. The BLS presents the quarterly data as:
How is it used? Productivity data is useful for "studying changes in labor utilization, projecting future employment requirements, analyzing trends in labor costs, examining the effects of technological improvements on employment and unemployment, analyzing related economic and industrial activities, and comparing productivity progress among countries." the BLS explains. The Fed primarily uses productivity to determine what is known as the maximum, non-inflationary growth rate of GDP, considered to be near 2.5% to 3%. Said another way, this is the fastest the Fed believes the economy can grow without sparking undesirable rates of inflation. It's based on the addition of the long-term annual rate of labor force growth and the annual rate of productivity growth. While the less-volatile labor force growth rate has historically been near 1%, the sustainable productivity growth rate is generally thought to be in a range of 1.5% to 2%. These total 2.5% to 3% and represent the long-term norm. However, short-term fluctuations in the growth rate of the labor force and productivity can temporarily create correspondingly different allowable rates of GDP. This can cause changes in monetary policy you might not initially expect. For example, if the economy is growing faster than its long-term normal potential, it's not necessarily inflationary and may not require a rate hike by the Fed. If this economic growth is matched or exceeded by the total of labor and productivity growth, inflation can actually be stable or recede. In such a case, the Fed could justify holding monetary policy steady or possibly cutting short-term interest rates. Conversely, if the economy is growing at a pace below its potential, it surprisingly could still be inflationary. This could occur if the total of labor and productivity growth is less than the growth rate of the economy. In this case, it raises the potential for higher inflation and Fed rate hikes. Explanation regarding the accuracy of nonfarm business productivity Despite the attention received by nonfarm business productivity, it's not the most accurate data series. The BLS admits that "data and other resources available for their preparation somewhat limit the productivity, output, compensation, and employment measures which can be constructed. In several sectors where output is difficult to define in a satisfactory way, productivity measures are correspondingly weak. Examples are the construction industry and the financial services sector." The BLS warns, "The productivity and costs measures for these sectors should be interpreted with caution." To get away from those sectors and help solve this accuracy problem, the Fed gives greater emphasis to the nonfinancial corporate data series. While it's considered more reliable, it takes nearly an extra month to produce. It's released along with the first revision. See below. When is it released? The BLS releases the productivity report approximately 35-to-40 calendar days after the close of the quarter, with the first revision released after an additional 30 days. You can find it on the BLS home page under the Economic News Releases section, labeled Productivity and Costs. Important Disclosures The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed. (2007-5771) Return to Top |
Schwab Guide to Economic Indicators
|
Facebook
LinkedIn
Twitter
Digg