The Power of Productivity

Productivity will be a catalyst for further disinflation.

Contestants on the game show The Price Is Right get a chance to compete for prizes by guessing the prices of various consumer goods. The winner is the one whose guess comes closest to the actual price, without going over. In that game, it is better to err on the cautious side than be disqualified for going too high.

Economic forecasters (ourselves included) must have watched The Price Is Right at a formative age. Over the past two years, we have had to revise a lot of numbers upward: the Fed hiked rates more than we expected, inflation has been sticky and growth has far exceeded expectations.

Last week’s employment report repeated that pattern. Against expectations of moderation, the report showed a stunning 353,000 jobs created, plus upward revisions to prior months. The unemployment rate held at the very low level of 3.7%.

Average hourly earnings showed a surprising acceleration to 4.5% year over year. Service sectors like education, healthcare and transportation saw the largest monthly gains, while goods-producing occupations were more temperate. We are somewhat sensitive to wage growth for the inflationary risk it poses; at last week’s Federal Open Market Committee press conference, Chair Jerome Powell cited limited improvement in services inflation as a reason to hold rates higher for longer.

The average workweek for all employees fell to a post-pandemic trough of 34.1 hours. That reading was lower than any value seen between 2010 and 2019. Aggregate weekly hours (the sum of all hours worked) dipped by over 10 million hours (-0.3%) from December, its largest decline since early 2022. This leads to suspicion of labor hoarding, with employers disinclined to let people go; instead, they cut costs by reducing hours.