I thought the inflation dragon was reliably on vacation as the Great Recession reduces demand for goods and services. But unit-cost (cost-push) inflation seems to have returned in the fourth quarter of 2008 with more ferocity than previously reported.
The BLS announced today revised figures for the fourth quarter of 2008 that show labor productivity declined 0.4 percent in the overall nonfarm business sector, as output fell faster than hours. Unit labor costs increased 5.7 percent. These are seasonally adjusted annual rates of change from the preceding quarter.
The decline was greatest in the manufacturing sector, where productivity (output per hour) fell 4.0 percent, a downward revision (from -3.0 percent) of one percentage point from numbers previously announced on February 5. Output dropped 17.7 percent, and hours fell 14.2 percent. The declines were all the largest since the series began in second-quarter 1987. Unit labor costs increased 14.7 percent.
Within manufacturing, reduction in hours exceeded reduction in output in nondurable manufacturing.
But reduction in hours was less than reduction in output in the case of durables. In the durable goods manufacturing sector, productivity dropped 14.8 percent, as output per hour fell 26.9 percent and hours declined 14.2 percent. (See Table B.) The decreases in output and output per hour were the biggest since the series began in second-quarter of 1987.
Fourth-quarter 2008 output per hour fell relative to the same quarter in 2007, the first negative figure in the chart going back to 2001. The unit cost increase is also higher than any other quarter on the chart. (See Charts 3 and 4.)
The loss of productivity would not surprise Harold Cole, Lee Ohanian and Ron Leung, who concluded (2005) that monetary shocks only account for one-third of the wouldwide loss of output in the Great Depression and that lowered productivity shocks accounted for two-thirds of the loss.
It’s not surprising that durable manufacturing would be showing a decline in productivity at a time when the future of the U.S. auto industry and other industries is in doubt. Imagine being an auto worker in this environment. Prescriptions for antidepressants have increased 15 percent during the last year even though marketing for them has fallen. There isn't much argument against the idea that personal depression reduces productivity. But higher unit labor costs won't help U.S. manufactures compete at home or overseas.