Economy cooking along for now but what’s with the continued drop in productivity?

Positive economic data today–for the short term. But some troubling longer term trends continue.

Initial claims for unemployment fell more than expected to 230,000 for the week ended January 27 versus expectations for 238,000 initial claims among economists surveyed by

On the positive side as well, the ISM Manufacturing Index came in at 59.1 for January against an expected 58.5 reading. The January number is down slightly from the very strong 59.3 in December, but it still shows a solid expansion in the manufacturing sector. (In this index anything above 50 indicates expansion.) The New Orders Index slipped to 65.4 from 67.4 in December but January marked a ninth consecutive month above 60.

But two disquieting pieces of information this morning too on the longer term health of the economy. First, unit labor costs rose 2% in the fourth quarter. Economists had been expected an increase of 1%. This is an indicator–perhaps since this is only the preliminary version of the data–of the kind of wage inflation that the Federal Reserve has been looking for/fearing in the economy.

Second, and its a number related to the rise in unit labor costs, productivity in the fourth quarter actually fell by 0.1%.

Economists had expected a pick up of 1%. Stagnant or even falling productivity has been a feature and puzzle of this economy for a while. The explanations advanced by economists aren’t especially convincing. But if productivity, the amount of GDP that a worker produces per hour worked, is falling, then it’s unfortunately logical that unit labor costs would rise along with economic growth. Falling productivity is not good news for inflation and inflation expectations. Average annual productivity climbed at just a 1.2% rate from 2007 to 2017. The long-term growth rate from 1947 to 2017 is 2.1% annually.

This morning in the financial markets the yield on the 10-year Treasury continued to climb (as prices for the bond fell) to 2.75%, up 5 basis points for the day so far. The U.S. dollar continued to weaken with the Dollar Spot Index falling 0.36% to 88.81. Gold has climbed 0.18% to $1345.50 an ounce. West Texas Intermediate is ahead 1.21% to $65.51 a barrel.

Tomorrow morning brings the big economic number of the week, the January jobs report.