Despite trade issues, productivity making solid gains

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Nonfarm productivity grew at a 1.4% pace in the fourth quarter after slipping 0.2% a quarter earlier, the Labor Department reported Thursday.

The rise helped keep down unit labor costs, which grew by 1.4% in the quarter, after climbing 2.5% in the third quarter.

Economists polled by IFR Markets expected a 1.5% rise in productivity and a 1.3% bump in unit labor costs.

Year-over-year, productivity gained 1.4% from the fourth quarter 2018, after a 1.5% rise from third quarter 2018 to third quarter 2019.

“Note that the improvement in productivity growth in 2019 occurred despite the tariffs and trade-related uncertainties that likely offset some of the positive deregulatory initiatives and policies from the Tax Cuts and Jobs Act,” Mickey Levy, Berenberg Capital Markets' chief economist for the U.S. Americas and Asia, and U.S. Economist Roiana Reid, wrote in a note. “Indeed, business fixed investment declined for three consecutive quarters in 2019.”

The performance continues “a trend of solid gains,” according to Levy and Reid. “Following years of subdued performance, productivity growth lifted to 1.3% in 2017-2018 and to 1.7% in 2019, the fastest rate of growth since 2010.”

Productivity rose 1.4% on average during the past three years after averaging 0.8% growth between 2012 and 2016, they said. “This is not exceptional by historical standards, but stronger productivity growth lifts estimates of longer-run potential GDP growth, constrains increases in ULCs, and supports higher real wages,” Levy and Reid added. “It is decidedly positive for broader economic performance. Surprisingly, this stronger productivity growth has been accompanied by sustained strong job growth.”

Separately, initial jobless claims fell to a seasonally adjusted 202,000 level in the week ended Feb. 1 from a revised 217,000 a week earlier, Labor said.

Continued claims gained to 1.751 million in the week ended Jan. 25 from 1.703 million a week earlier.

Claims haven’t been this low since April.

Economists expected 215,000 initial claims and 1.720 million continued claims.

Coronavirus still a concern
“Worry over the coronavirus continued to weigh on markets, leading to the continued decline of longer-term Treasury yields,” said Bill Merz, director of fixed income at U.S. Bank Wealth Management. “The U.S. Treasury curve flattened, and some parts of the curve inverted.”

At the recent Federal Open Market Committee meeting rates were held steady and members indicated they are comfortable with rates where there are now, despite stubbornly low inflation.

“Market odds of a rate cut rose on fears the coronavirus will dampen economic activity and necessitate looser monetary policy, though the Fed indicated its outlook remains unchanged for now,” he said. “The Fed’s commitment to continue short-term lending operations and Treasury bill purchases through at least the second quarter should be viewed as maintaining its commitment to ample liquidity in short-term lending markets.”

Scott Colbert, chief economist at Commerce Trust Company, said the consequences from the coronavirus “will be material” and linger longer than those of the severe acute respiratory syndrome, or SARS, outbreak in 2003.

“This continues the theme that you get these little pockets of headaches that allow the economic expansion to continue because it gets to slow down a little bit to prevent overheating,” he noted.

It’s understandable why this is a concern, said Bryce Doty, senior portfolio manager at Sit Investments. “It’s easy to see how vulnerable markets are when you consider that even just a 5% fatality rate (half that of SARS) will create fear and hurt economic activity,” he said. “If you have a family of five and you catch the virus, sadly, it’s likely the whole family could be infected within a week and a fatality rate of 5% means there is a one in four chance a loved one won’t survive it.”

As a result, he added, “People stop taking mass transit, going to movies and restaurants and take other precautions to reduce their risk of contracting the virus.”

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