Labor Costs Looking Better

Unit labor costs look better than we thought.  Data revisions are usually not worth posting about, but today’s news was very big:


The concept of unit labor costs is to measure the labor costs of producing one unit of output.  We’re not interested in a dollar figure, but rather changes in costs over time.  ULC takes into account both wage and benefit costs (compensation) and productivity.  So high wage rates would push ULC up, but higher productivity pulls ULC down.  Thus, ULC measures how labor costs are affecting businesses.  (We show non-farm business data in the chart above.)

With today’s data release, the Fed will not be quite so hesitant to hold interest rates high.  Indeed, even before the news there was a sense in the financial markets that the Fed might cut in March.  (See the Cleveland Fed’s calculation of implied probabilities of different Fed actions, derived from market data.  And thanks to Calculated Risk for the link.)

Business Strategy Implications: Don’t expect a lot of pricing power in 2007.  Your business’s performance depends in getting productivity growth that exceeds your industry’s average.   Good luck with that.