Posted originally on the conservative tree house on August 9, 2022 | Sundance 

The previous first quarter productivity drop of 7.4% was the largest quarterly drop in 74 years.  Today the Bureau of Labor Statistics (BLS) reports the second quarter productivity dropped another 4.6% [Data Here].

For July, companies are paying 5.7% higher wages and getting a 4.6% drop in output, resulting in a total unit labor cost increase of 10.8%.  That increase in final output cost will either result in higher prices or lower profits.

With weak consumer purchasing (low demand) already creating an inventory surplus, hence lower outputs, lower profit leads to cutbacks.  The largest company expenses are generally labor and energy costs. The more variable and controllable of those two expenses is labor.  You know what comes next.

(WSJ) – […] Rising productivity is the key to improving living standards; it allows companies to raise wages without raising prices and fueling inflation. Instead, businesses appear to be paying workers more to produce less. The higher unit labor costs suggest companies will either endure lower profits or pass on higher costs to consumers.

“The trend in productivity growth has worsened compared to prior to the pandemic, and the surge in unit labor costs makes the Fed’s challenge of getting inflation back down to its 2% target all the more challenging,” Wells Fargo economist Sarah House said in a research note.

The central bank has increased rates four times this year from near zero in March in an effort to raise borrowing costs, slow economic growth and bring inflation down.

The consecutive negative productivity readings are a reversal from earlier in the pandemic, when the economy was expanding rapidly and businesses appeared to be adopting new technology to cope with worker shortages and limits to face-to-face contact. (read more)

Meanwhile, “U.S. manufacturing output in June was down by 0.4% compared with March though it was still up by 3.6% compared with the same month a year earlier, estimates prepared by the Federal Reserve Board found. Three-month output growth was the weakest since early 2021, and confirms slackening momentum evident in other data on output, orders and jobs.” (Reuters)

This month’s inflation report (reflecting changes in July) will show a large decline in overall inflation. This will provide the White House with a false narrative of confidence that inflation has peaked.  However, food inflation (farm prices not yet realized) will combine with wage inflation (as noted above) sometime around October, and then we enter another round of rising prices.

The prices for durable goods have likely peaked.  If you are in the market for an expense item (appliance, furniture, etc) look for significant incentives to trigger in Sept/October; right around the same time when the layoffs start.  So, sit tight for a few more weeks.

However, the prices for highly consumable products will present a false plateau (Aug/Sept) until they go bananas again just before the Thanksgiving holiday season.

Prepare and time your affairs accordingly.