Productivity Fell and Unit Labor Costs Rose in Fourth Quarter

(Updated from 8:44 a.m. EST)

Revised productivity data released this morning shows that productivity fell and unit labor costs rose during the fourth quarter. That's a double negative for corporations since it means they are producing fewer units of goods and paying more for each one.

Investors took no heed of the report, and stocks are having a banner morning. The revised number for fourth quarter came in at 2.2%, down from the third quarter's 3%, but above the 2.0% economists had forecast. Unit labor costs grew 4.3% in the fourth quarter, well above the third quarter's 3.2% increase and economists forecasts of 4.1%.

Nonfarm business productivity was revised downward from an earlier estimate of 2.4%, and unit labor costs were revised upward to 4.3% from an earlier estimate of 4.1% for the quarter.

Most on Wall Street are expecting another half-point cut at the Federal Reserve's next meeting on March 20, and some are hoping for more. The weaker each round of economic data, the more aggressive the Fed is likely to be with cuts and the quicker the economy is likely to turn around, goes the thinking. Lower interest rates help to ignite economic growth because they make it cheaper to pay off debt and encourage consumer and corporate spending.

This report, however, does provide some evidence that companies recognized the depth and swiftness of the economic decline during the fourth quarter, and have acted to avoid an explosion in unit labor costs. Compared with other recent slowdowns, the revised 2.2% rate of productivity actually isn't so slow -- and year-over-year, productivity is still growing at a rate of 3.4%.

Normally, when demand slows to a trickle as many economists believe happened in the fourth quarter, productivity nose-dives, as companies produce much less. However, the number of hours worked fell 1.4% in the fourth quarter, suggesting that companies reacted to the sharp slowing by cutting back on labor to offset the decline in demand.