Productivity Losses Becoming Critical for Market Performance

The US Bureau of Labor Statistics has reported a fall in labour productivity in the March quarter and growth of only 0.6% over the four quarters to the end of March 2015, well below the 1.8% average pace throughout the 2000s. The chart shows real unit labour costs for the non farm business sector of the US economy. This statistic brings together labour productivity, compensation and prices. Falling real unit labour costs are an indicator of business margin expansion at the macro level. The change in direction during the 2000s has been dramatic and consistent with a re-pricing of US equities but this important source of improved business performance is no longer as powerful as it used to be. At current rates of productivity growth, stronger wages growth - widely considered desirable to encourage higher rates of consumption spending - would result in a rise in unit labour costs and downward pressure on business profits. The significance of this pressure grows as the US market must rely less on monetary stimulus for share price appreciation.