Wednesday, September 06, 2006

Unit Labor Costs to Fuel Inflation?

The Labor Department released figures today on productivity and unit labor costs for the second quarter. Both were disapointing with productivity posting a 1.5% gain while unit labor costs were up 4.8%. Of course the two go together; lower productivity will naturally result in higher unit labor costs. Unit labor costs rose at a slower pace than the first quarter when they rose 9%, but that's small consolation for those hoping that inflation has peaked (that would include us). Of course, there's no guarantee that higher unit labor costs will result in higher inflation as companies could choose to book lower profits. However, it seems everyday that we read about some company or another raising prices. The most recent example is Caterpillar which announced yesterday that they will be raising prices in January.

In the Federal Reserve's Beige Book report (isn't that a perfect name for a report from a bunch of economists?) this afternoon there are hopeful signs:

Labor markets were mostly described as steady since the last report, with scattered labor shortages and associated upward wage pressures noted in a number of Districts, especially for workers with specialized skills. Widespread increases in the prices of energy and certain other commodities persisted since the last report, though most of these increases do not appear to have passed through to finished consumer goods.

The report also characterized the real estate markets much as we have:

Housing markets and home construction activity weakened throughout the nation, but commercial real estate and construction strengthened in most Districts....Commercial real estate markets were uniformly described as strong and, in most cases, increasingly so. Office markets showed noticeable signs of improvement in the Boston, New York, Philadelphia, Atlanta, Chicago, Minneapolis, Kansas City, Dallas and San Francisco Districts.

We have been arguing that a housing market slowdown will be at least partially offset by an increase in commercial construction. It's good to see some confirmation.

The market has responded negatively to the economic news today (or perhaps we were just due for a pullback after the August gains), but overall, we don't see much change. The Fed is still likely to sit on their hands at the September meeting.

Beige Book Report

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