If you thought the inflation dragon was has been reliably slain (or at least temporarily exiled) by the St. George of reduced demand, consider that the record increase in unit labor costs in the fourth quarter of 2008 was revised up.
The BLS announced today revised figures for the fourth quarter of 2008 that show unit labor costs increased at an annualized rate of 5.7 percent over the previous quarter.
In the manufacturing sector, labor productivity (output per hour of work) fell 4.0 percent, revised from the figure previously announced on February 5 of -3.0 percent (i.e., worse by one percentage point). Output dropped 17.7 percent, and hours fell 14.2 percent. Each of these declines was the largest since the series began in second-quarter 1987. Unit labor costs increased 14.7 percent at an annualized rate.
In nondurable manufacturing, reduction in hours exceeded reduction in output. But in durable manufacturing -- which includes the automotive industry -- the percentage reduction in hours was less than the percentage reduction in output. Productivity dropped 14.8 percent, as output per hour fell 26.9 percent and hours declined 14.2 percent. (See Table B in the cited BLS report.) The decreases in output and output per hour were the greatest since the series began in second-quarter 1987.
Fourth-quarter 2008 output per hour fell relative to the same quarter in 2007, the first negative figure in the BLS chart that goes 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 account for only one-third of the worldwide loss of output in the Great Depression and that lowered productivity shocks accounted for two-thirds.
It is also not a surprise that durable manufacturing would be showing a decline in productivity at a time when the future of GM, Chrysler and many other companies is in doubt. Prescriptions for antidepressants have increased 15 percent during the last year even though their marketing budgets have fallen. Personal depression reduces productivity.
But for U.S. officials seeking to address in sequence the recession now and inflation later, and who are trying to save jobs in the auto industry, these high increases in unit costs are a distraction.