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Non-farm productivity rose at an annual rate of 1.6% in the second quarter after a 0.5% drop in the prior quarter. Productivity in the first-half of the year (+1.05%) exceeds that of the second-half of 2011 (+0.5%). Why do we pay attention to productivity data? Productivity is one of the most important indicators of economic health because it drives incomes and standard of living of an economy.
Unit labor costs, another piece of data in the productivity report, rose 1.7% in the second quarter but slowed from the sharp increase of 5.6% in the first quarter. The year-to-year change in unit labor costs offers clues about impending inflation in the economy. In the second quarter, unit labor costs rose 0.8% from a year ago after a steady reading in the first quarter. The bottom line is that the underlying trend of unit labor costs does not present a threat of inflation in the economy. In sum, productivity improved and unit labor costs are contained; this report is not a cause concern for the Fed.