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Weekly Economic Commentary


U.S. Productivity Improves, Labor Cost Remains Contained

November 3, 2011

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Productivity of the U.S. economy rose 3.1% in the third quarter, after posting decline in the first-half of the year. The downside of the improvement in productivity in the present environment is that it prevents firms from increasing payrolls.

Chart 1 - 11 03 11


Unit labor cost dropped 2.4% in the third quarter compared with gains in the first six months of the year. The recent trend of unit labor cost suggests that labor cost pressures are absent (see Chart 2) and do not present a threat of inflation. This is a source of comfort as it allows the Fed to focus on economic growth in the formulation of monetary policy.

Chart 2 - 11 03 11


The Fed’s Forecast Begs for Action, Bernanke Hints at QE3

The main conclusion from Bernanke’s press conference on November 2 is that the Fed has two choices. QE3 (quantitative easing) is one option given the Fed’s gloomy forecast (see Table 1). The precise timing, magnitude and composition of QE3 are unknown but Bernanke’s responses suggest that there is a willingness to engage, if essential. Large asset purchases are likely to be a combination of Treasury securities and mortgage-backed securities. The second alternative is its communication strategy much like the August announcement that the federal funds rate would be held at the current rate at the least until mid-2013. In other words, it would entail tying interest rate decisions to economic conditions in policy communications.

Bernanke described the circumstances under which the Fed would consider policy easing as follows: Additional policy support would follow if economic growth is insufficient or inflation is below the level consistent with price stability. Chairman Bernanke also noted that the Fed had taken aggressive steps in the past two meetings and would act again if required. Essentially, the Fed is buying time, for now. The Fed will have more data about business conditions in October and November prior to the December 13 FOMC meeting. The Fed would need a higher unemployment rate, noticeably tepid increase in payrolls, weak retail sales, and the tone of economic reports leaning towards a further weakening of economic conditions to consider new policy action. Incoming economic data – ISM manufacturing survey, auto sales, housing starts, new home sales, orders of durable goods – do not suggest that the U.S economy is on the brink of another recession. The October employment data could change this assessment; employment numbers are reputed to offer surprises of all sorts. Our forecast is a 9.2% jobless rate and an increase in payroll employment of 100,000.

Table 1 - 11 03 11

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20111102.pdf



Wondering About the Size of Greek Debt Exposure?

Greek drama is now no longer confined to the literature class. The current Greek economic drama will be enshrined in economic history books and economic/financial policy studies. As the crisis has unfolded, it has been frequently challenging to find a succinct representation of the exposure to Greek debt. Thanks to the folks at the BBC, here is that picture.

Table 2 - 11 03 11

Source: http://www.bbc.co.uk/news/business-13798000












The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.