Inflation, Productivity, and Consumer Sentiment

Week in Review: August 8-12

Like beauty, transitory is in the eye of the beholder. Inflation appears to have peaked, which is the really big news this week (other than the 58-53 Orioles). Markets rallied in response (to the inflation number, not the Orioles). It was a good week for the economy, but there were no releases on a non-manic Monday, so let’s jump right to two-for-Tuesday.

Tuesday

NFIB Small Business Optimism Index

This index increased in July but remains well below average. Nearly 4 in 10 small business owners indicate that inflation is their most important problem. That means many think there is something even more important! The good news is that fewer owners report raising their average selling prices than in June. The bad news is that over half of owners still reported raising their average selling prices. But this could be viewed as good news from a demand perspective since it suggests that purchasers still exhibit willingness to pay.

Labor Productivity

According to these data, labor productivity declined 4.6% during the second quarter (output fell about 2%, hours worked increased 2.6%). When you remember that real GDP contracted during the second quarter, it makes sense that labor productivity fell (productivity equals output/hour worked). When you think of it as “the average American worker became 4.6% less productive during the second quarter,” it makes a lot less sense. Here are a few possible explanations:

One: during the pandemic, a lot of lower-output jobs went unfilled, and that caused average productivity to surge between Q2 2020 and Q1 2021. Now that those lower-output jobs are being filled again (e.g. restaurants and bars added 74,000 jobs in July—they can be productive, but not like workers in manufacturing and yes, finance), productivity is falling. Two: there are a lot of people in new jobs, and your output is lower when you’re starting a new gig because you have no idea what you’re doing. Three: productivity data are incredibly volatile on a quarter-to-quarter basis, and this is just statistical noise.

Regardless of which (if any) of these is right, these data represent a problem for businesses. Productivity growth correlates to profitability.

Wednesday

Consumer Price Index (CPI)