Mortgage Commentary

[KenP]

That reminds me of what I wrote yesterday stating that fourth-quarter productivity will be the highlight of the week, "if there is one," joked Warren Lovely, an economist for CIBC World Markets. Other indicators include the Institute for Supply Management's nonmanufacturing survey, consumer credit, and wholesale inventories.

With gross domestic product rising a robust 3.5% during the quarter, productivity probably picked up to its fastest pace since the first quarter.

The data will be released on Wednesday at the Labor Department. Economists surveyed by MarketWatch were calling for a 2.2% annualized gain in productivity after a dismal 0.2% gain in the third quarter.

Unit labor costs, which are a key inflationary gauge, should also improve markedly. The median forecast of the economists sees costs rising at a 2% annual rate, down from 2.3% in the third quarter.

Unit labor costs are the difference between compensation growth and productivity growth. Unit labor costs "should look a little friendlier for inflation," wrote Credit Suisse economists in their outlook.

For the year, productivity probably rose 2.2%, with unit labor costs up about 2.7%.

Productivity is one of the most important economic concepts. High productivity growth means the economy can grow rapidly without inflation, raising living standards and theoretically allowing workers to get big raises without hurting the boss's profits.

But a low rate of productivity growth can mean a sluggish economy and increased inflationary pressures.

In any given quarter, productivity will closely mirror gross domestic product growth. That's because productivity is simply output divided by hours worked.

Over a longer period of time, productivity trends will determine how fast the economy can grow.

The expected rise in fourth-quarter productivity "is actually a bit better than the sustainable trend," wrote David Greenlaw and Ted Wieseman, economists for Morgan Stanley.

Productivity averaged about 2.7% annually from 1948 to 1970, then slowed to 1.6% from 1971 to 1995. Since then, productivity has grown about 2.5% annually.

Productivity has slowed in the past few years. One of the big debates in the economy is whether that slowing is structural or related to the business cycle. If it's structural, Americans will have to get used to slower growth. If it's cyclical, then the long-term speed limit of the economy will stay above 3%.