Economic Gasping

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The Wall St Journal (subscription required) sent the following report by e-mail today:

August 10, 2004 -- 1:07 p.m. EDT

Productivity Growth Slows, Raising Fears About Recovery

By SOPHIE HAYWARD
THE WALL STREET JOURNAL ONLINE

Confirming fears that the long-predicted slowdown in productivity growth may be finally materializing, the Labor Department said the efficiency of U.S. workers grew at its slowest pace in 18 months in the second quarter. Nonfarm-business productivity grew at a seasonally adjusted annual rate of 2.9% from April through June, following a 3.7% rise in the first quarter, and representing the smallest gain in productivity since the 1.6% increase recorded in the fourth quarter of 2002. But the news wasn't as bad as some feared. Many economists had predicted an even sharper drop off, reflecting the economy's sharp deceleration in the second quarter.

Any tidbit of optimism bolstered by better-than-expected productivity was offset by unit labor costs, which rose 1.9% following a 0.3% increase in the first quarter -- the biggest consecutive rise in two years. Hourly compensation, which includes both wages and benefit costs, also climbed by a sharp 4.9%. The labor-cost numbers were a reminder that whatever benefits companies may see from productivity increases may be eroded by higher payroll costs.

Many economists, however, were more focused today on the Federal Reserve's expected increase in short-term interest rates later in the day.

Later on, The Fed raised rates by 0.25% (250 basis points), which prompted a rally on Wall St. The Journal published this account:

U.S. Federal Reserve Raises Key Lending Rate to 1.5%

By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
August 10, 2004 5:05 p.m.

WASHINGTON -- The Federal Reserve, as widely expected, raised short-term interest rates for the second time this year, but also acknowledged the economic outlook was cloudier, making later rate increases a bit less certain.

The Fed's policy-making committee unanimously voted to raise its target for the federal-funds rate to 1.5% from 1.25%. The Fed began raising rates at its June meeting, which marked the first increase in four years.

In a statement released with its decision, the Fed said, "In recent months, output growth has moderated and the pace of improvement in labor-market conditions has slowed," which it blamed on "the substantial rise in energy prices." That statement reflected the downbeat tone of recent economic reports, in particular a surprisingly weak employment report that showed

only 32,000 jobs were added to nonfarm payrolls in July, a fraction of the 150,000 to 200,000 needed just to keep up with population growth. That report, together with a softening in consumer spending in June, triggered largely by higher oil prices, has prompted some economists to warn that the economic expansion could be in danger.

The Fed, however, doesn't seem share that view. In its statement, the central bank said, "The economy nevertheless appears poised to resume a stronger pace of expansion going forward."

I commented on this story earlier today in the L&F Blog, and posted a poll for those interested. I also note that Larry Kudlow, on CNBC this morning, repeatedly called the current state of affairs "STAGFLATION-LITE." Oddly enough, I am not that far from Kudlow's ultra-conservative views.

August 10, 2004

Last update: 11/02/2007