In his latest Lunch with Dave note, Gluskin-Sheff’s David Rosenberg calls out the big paradox of the economy:
Well, there is such a thing as too much of a good thing. U.S. productivity growth
moderated but not nearly as much as expected in Q1 (remember, the pace of
economic activity moderated too) — to a 3.6% annual rate (the consensus was
expecting 2.6%) versus 6.3% in Q4 and 7.8% in Q3. The message here is that
the recovery is being totally dominated by productivity with very little in the way
of labour input.
Of that 4.4% rise in nonfarm business output in Q1, 80% was accounted for by
productivity growth, not far off what we saw in Q4 (in the current cycle
productivity is accounting for nearly 100% of output growth, compared to 50% in
prior cycles going back to the early 1950s). Real compensation per hour
stagnated in Q1, and this followed outright declines the prior two quarters — a
whole series of other cash flow boosts from extended jobless benefits, to
strategic defaults and tax credits, are helping underpin consumption. Organic
income growth is just not there because of all the slack in the jobs market — that
is so evident in these data.
Unit labour costs fell at a 1.6% annual rate — the third decline in a row and down
now in 4 of the past 5 quarters (-3.7% YoY). This is the dominant factor affecting
the inflation backdrop. Moreover, the price deflator for the corporate sector was
a mere +0.6% at annual rate in Q1 and +0.1% on a YoY basis. In other words,
the corporate sector, notwithstanding the profits rebound, which has been
centered more in financials than in industrials, is 10 basis points shy of outright
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