Low Productivity + High Labor Costs = Inflation??

by: SA Eli Hoffmann

Excerpt from our Wall Street Breakfast, a one-page summary of this morning's key market-moving and stock-moving stories:

Productivity Growth Skids to Standstill [AP]

Summary: In yesterday's economic numbers, productivity (a measure of output per hours of work) sunk to 1.3%, its poorest showing in nine years; productivity has averaged 2.8% over the last decade and 3.1% over the last 5 years. Conversely, unit labor costs (compensation per hour) grew 3.7%, down substantially from Q2, but higher than analysts' estimates of 3.4%, and employee compensation grew by 5.3%, a level it hasn't seen since 1990: workers were earning more to do less. Both figures caught analysts by surprise; they said the numbers were certain to raise Fed inflation concerns. At best, they said, the news meant the Fed wouldn't be cutting interest rates anytime soon; at worst, the continued rise in wage pressures could prompt the Fed to resume raising its benchmark rate. Scott Brown, chief economist at Raymond James & Associates: "The unit labor costs number is a bit unsettling for the Fed... so many people have focused on commodity prices, but the Fed's real fear is always the labor market and the possibility of inflationary pressures developing there." Stocks and bonds were down on the news.
Related links: Press releaseDavid Andrew Taylor: Productivity Drop: More Money For Less Work
Potentially impacted stocks and ETFs: S&P 500 Index (NYSEARCA:SPY) • NASDAQ 100 Trust Shares ETF (QQQQ) • iShares Russell 2000 Index ETF (NYSEARCA:IWM) • iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY) • iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF) • iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT)

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