Hard Landing Scenario Becomes More Real Amid Lower Productivity Numbers

With eyes on jobs, wages, and inflation, it’s easy to forget how much impact productivity — the effort and cost that goes into a unit of work — can have on the economy.

The latest numbers that came out Thursday, May 2, showed a 0.3% month-over-month increase in productivity and a 2.9% year-over-year increase for the first quarter of 2024.

The weaker productivity does present a challenge for the Federal Reserve as unit labor costs were up 4.7% year over year in the first quarter, that being a combination of 5.0% increase in hourly non-farm hourly compensation and the 0.3% productivity increase.

“Productivity growth wasn’t strong enough to significantly mitigate the rise in wages last quarter as unit labor costs rose a robust 4.7%,” Nationwide Financial Markets Economist Oren Klachkin wrote in a note on Thursday. “The strong rise in unit labor costs is another in a string of recent data points indicating that inflation pressures remain relatively high.”

That could ultimately mean a difficulty in a Fed-delivered soft landing.

The view of ongoing labor costs is also more complex than it might sound. “Unit labor costs posted their largest increase in four quarters but continued to trend lower on a y/y basis, pointing to slower growth in wages and inflation in the quarters ahead,” Oxford Economics wrote in an emailed note. They also thought that productivity has been volatile in recent years and would likely to “edge lower as GDP growth slows modestly.” Which makes sense, because if productivity kept improving, a more efficient economy would likely be stronger rather than slowing.

“Analysts said the first-quarter results don’t on their own disrupt what has been a core reason for optimism that the U.S. was heading for a “soft landing” in which inflation would return to the Fed’s 2% target without the sort of sharp rise in joblessness associated with past battles against rising prices,” Reuters wrote. “But it also keeps alive the question of how much the Fed can count on additional improvement in the economy’s ability to supply goods and services to help in the inflation fight, and how much will now rest on curbing demand — potentially dealing a blow to employment in the process.”

And curbing demand would mean lower GDP growth, especially how 68% of the figure depends on consumer spending. More pressure on jobs and wages could then cut demand even more, leading to further slowdowns in economic growth and raising the potential of a recession.