Morning Report: Productivity Declines

Posted on February 6, 2025 by Brent Nyitray

Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are down small.

The services PMI declined in January, according to the Institute for Supply Management. The index declined from 54% to 52.8% on weaker activity and orders, however it remains in expansion territory, where it has been for nearly the past 5 years.

While activity declined somewhat, there were two bright spots. Employment increased by 1% and prices declined by 4%. Tariffs remain a worry. “January was the second month in a row with all four subindexes that directly factor into the Services PMI® — Business Activity, New Orders, Employment and Supplier Deliveries — in expansion territory. Slower growth in the Business Activity and New Orders indexes led to the lower composite index reading. Poor weather conditions were highlighted by many respondents as impacting business levels and production. Like last month, many panelists also mentioned preparations or concerns related to potential U.S. government tariff actions; however, there was little mention of current business impacts as a result.”

Announced job cuts increased 28% to 49,795 in January, according to the Challenger and Gray Job Cut Report. While this is an increase from December, there is a big seasonal element, and it is a decrease of 40% compared to January of 2024. Hiring plans increased.

Productivity declined in the fourth quarter to 1.2% compared to 2.3% in the third quarter. Unit labor costs increased from 0.5% to 3.0%. This might have explained why inflation reappeared in Q4. Output increased 2.3% and hours worked increased 1%.

Productivity is a big driver of non-inflationary growth, and it has been trending down for the past couple of years. Note that productivity collapsed in 2022, right about the time inflation was peaking

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