U.S. Nonfarm Productivity Plunges and Unit Labor Costs Surge in Q3’21
Nonfarm business sector productivity fell 5.2% (SAAR) (-0.6% y/y) in Q3’21, revised from a preliminary 5.0% decline and following a 2.4% Q2 increase. It was the sharpest decline since Q2’60. A 5.0% decline had been expected in the Action Economics Forecast Survey.
Nonfarm business production grew 1.8% last quarter (6.2% y/y). The gain was the smallest in five quarters. Growth of hours-worked surged to 7.4% (6.8% y/y), the strongest rise in three quarters.
Compensation per hour rose 3.9% (5.8% y/y), the fourth straight quarter of growth and revised from a preliminary rise of 2.9%.
The rise in compensation and the fall in productivity combined to lift unit labor costs 9.6% (6.3% y/y) to a record level, revised from a preliminary rise of 8.3%, and following a 5.9% increase in Q2. An 8.3% increase had been expected.
In the manufacturing sector, productivity declined 1.8% (2.2% y/y), revised down from 1.0% and after surging 8.4% in Q2. Output rose 5.1% last quarter (6.1% y/y), revised down from a 5.7% rise, and hours-worked increased 7.0% (3.9% y/y), revised up from a 6.7% rise and after falling 2.5% in Q2. Factory sector compensation rose 2.7% in Q3, firm for the fourth straight quarter. Unit labor costs rose 4.6%, revised up from a 2.9% increase and following a 1.7% rise in Q2.
Indexing to Q1’20 = 100, ULC are clearly accelerating but surging demand has protected margins so far:
Here’s another way to plot the same data…
…explaining the declining margins before Covid-19:
Inflation Emerges as a Key Concern for Voters, WSJ Poll Finds The new Wall Street Journal poll finds that a majority of voters say inflation is causing them financial strain.
Some 56% in the new survey said inflation was causing them major or minor financial strain, including 28% who said they felt major pressures. More than half said gas and groceries were among their greatest concerns when it came to rising prices, with about a quarter citing housing and utility bills. (…)
Some 52% said they expected the cost of living to worsen in the next year, compared with 23% who said it would likely ease. (…)
Views were more tempered when voters were asked about their personal financial situation: Some 31% said they believed it would improve in the next year, compared with 24% who said it would get worse. Some 38% expected no change. (…)
Companies Plan Big Raises for Workers in 2022 Companies are planning for steeper wage increases next year than at any point since the 2007-2009 recession, according to a new report, amid a tight labo
r market and the highest inflation in three decades.
A survey by the Conference Board set for release Wednesday finds that companies are setting aside an average 3.9% of total payroll for wage increases next year [vs 2.9% on average since 2011], the most since 2008.
The survey also shows that companies are planning on raising salary ranges, which would result in higher minimum, median and maximum salaries. That suggests pay raises could be broad-based and affect workers across a company’s pay scale. (…)
- British supermarket chain Tesco facing pre-Christmas strikes Warehouse and truck drivers based at depots in Belfast and Antrim in Northern Ireland, Didcot in southern England and Doncaster in northern England were taking strike action in protest over the supermarket group’s offer of a 4% pay rise.
Retailers Restocking Inventory Face a Potential Post holiday Hangover Merchants are rushing in orders ahead of the end-of-year holidays, but delivery delays may leave them with a surplus of untimely wares
(…) “We’d much rather have too much inventory than not enough,” said Ms. Pasqualone. “But then that eats up your margins as well.” (…)
Broad measures show retailer stocks remained severely depleted heading into the fourth quarter. U.S. retailers held $602.7 billion in inventories in September, according to U.S. Commerce Department figures, compared with the $664.4 billion they held in September 2019, before the pandemic upended supply chains. (…)
The risks of overbuying are higher for retailers that sell a narrow range of products or goods that age quickly, such as fast fashion or Christmas sweaters, than they would be for general merchandisers whose array of merchandise provides a natural hedge. (…)
Supply-Chain Snags Likely to Persist, Three CEOs Say The chiefs of Intel, Wayfair and Accenture each said that the disruptions rippling across the U.S. economy are improving for some companies but that long-term fixes might take much longer.
(…) Chip giant Intel, which has been at the center of the global semiconductor shortage, expects supply-chain issues to last through 2023, partly because it takes three years to build a new factory, CEO Patrick Gelsinger said. (…)
He said the company has plans for a large U.S. factory he called a “megasite” to move production closer to where chips are needed. (…)
Yellen Says Supply-Chain Shift May Need Protectionist-Like Steps
(…) “It’s possible that policies that people will describe as protectionist are going to be necessary in order to create the appropriate incentives to produce things at home,” Yellen said in an interview recorded on Monday for an online conference hosted by the Financial Times.
The Treasury chief also said, “certainly we want to work with other countries — with our allies and partners — to address supply-chain resilience on a collective basis,” in remarks aired Tuesday. “So, I don’t think this is just about the United States making everything at home, but in some cases that may be part of the answer.” (…)
Yellen also repeated her views that elevated inflation was mainly caused by pandemic-related supply issues, and that it would fade as the virus came under control. She said she saw no evidence of a wage-price spiral that could sustain the pace of price increases for an extended period.
While the economy and the jobs market remained strong, she conceded that the continued low supply of labor was “a mystery” amid the high demand for workers. (…)
INFLATION VS PROFIT MARGINS
The latest IHS Markit US Sector PMI™ revealed that six of the seven broad sectors tracked by the surveys reported higher output in November, up from five in October, with the Technology sector having returned to growth. Healthcare continued to lead the sectors, which perhaps comes as no surprise amid the slight pick-up in COVID-19 cases across the US.
Consumer Goods, on the other hand, persisted as the worst performer and remained in contraction. Worryingly however, rather than being demand led, the lowered output had been a reflection of the lingering supply chain crisis. (…)
Studying the US Sector PMI sub-indices performance, one would find that output had indeed been lagging demand primarily across goods-producing sectors including most notably Consumer Goods but also Technology and Basic Materials. This is an important issue as highlighted in our IHS Markit US Manufacturing PMI report.
Despite some of these supply chain problems having eased in November, the extent to which production growth had been constrained is consistent with manufacturing acting as a drag on the economy during the fourth quarter. Similarly for US sectors, this will be something to continue scrutinising given the potential drag this could pose to output and thereby corporate earnings going into 2022.
US sectors output minus new orders indices
Of no surprise here, the demand-supply imbalance had thereby proven it is a sellers’ market as input prices surged across all seven sectors. This was most notable amongst the goods-producing sectors, led by the Consumer Goods sector in November.
Meanwhile, consistent with the global trend, service sectors had similarly experienced higher costs, driven by higher material prices, energy prices and staff costs. This is also observed through the wider US manufacturing and services PMI price indices.
Although IHS Markit continue to view the issue of soaring inflation rates, particularly in the West, as a bigger problem in the short-term with headline inflation rates set to moderate from 2022 as supply bottlenecks clear and pent-up demand dissipates, the potential “second round” effects – whereby current elevated inflation rates could feed through to higher wages – should not be ignored. The potential for this to become a bigger problem will continue to be watched through the mix of US sector performance going forward.
US sectors input price indices
For investors, the next chart is the most intriguing. As the recent PMI surveys have revealed, manufacturers are finding it increasingly difficult to fully pass on their cost increases. The “sellers’ market” is weakening as consumers are balking at higher prices. Look at the huge and rising gap between manufacturing input and output prices. In the last 4 months, fewer and fewer companies have increased output prices while more and more of them reported rising input prices:
US manufacturing and services price indices
While goods inflation may be slowing (but not declining), both output and margins seem to be suffering during Q4.
Gundlach Sees ‘Rough Waters’ for Market as Fed Pursues Taper
During a webcast Tuesday about his DoubleLine Total Return Bond Fund, the billionaire money manager advised keeping an eye on the high-yield bond market, a potential “canary in the coal mine” for risk assets.
With debt levels having surged during the pandemic, the increase in borrowing costs is poised to create headwinds for economic growth, and trouble could emerge when short-term rates surpass 1%, Gundlach said. Two-year yields are currently about 0.69%.
The bond market already is reflecting signs of difficulty ahead, with the yield curve flattening. Gundlach also said that the historically low level of yields across the curve today makes this flattening a doubly powerful signal of concern.
Here are some other takeaways from Gundlach’s remarks:
- He focused heavily on inflation, saying the annual pace of gains in the consumer price index could hit 7% in the next month or two. He ran through numerous inflation measures and pointed out that shelter costs have climbed significantly. He also said it’s possible that the CPI inflation gauge won’t drop below 4% throughout 2022.
- Markets could face more volatility now that the Fed has said it might quicken its tapering program.
- Gundlach reiterated that he bought European stocks for the first time in 12 years, which he disclosed a few months ago. He still owns some of those and they’ve done just OK until recently. He didn’t own emerging-markets equities, though he envisioned a scenario when they might outperform U.S. firms. “We’re looking for major opportunities” and emerging markets could be one over the next few years, he said.
- The dollar has been in structural decline since 1985, he said, reiterating that the twin-deficit problem (that’s the current-account gap and the federal budget deficit) will cause the greenback to fall over time, which bodes well for emerging markets.
- Gundlach said he’s not sure “it’s the greatest time to buy commodities” given how much their prices have been rising. And for preservation of capital, he recommended a short-duration bond fund.
- He said he last bought gold, personally, in 2018 and that he likes it as a long-term hold.
Chinese developer Kaisa suspends share trading as potential default looms
Studies suggest Pfizer shot may protect only partially against Omicron
The Omicron variant can partially evade protection from two doses of Pfizer (PFE.N) and partner BioNTech’s COVID-19 vaccine, the research head of a laboratory at the Africa Health Research Institute in South Africa said on Tuesday.
But the study showed that blood from people who had received two doses of the vaccine and had a prior infection was mostly able to neutralize the variant, suggesting that booster doses of the vaccine could help to fend off infection. (…)
The World Health Organization classified it on Nov. 26 as a “variant of concern,” but said there was no evidence to support the need for new vaccines specifically designed to tackle the Omicron variant with its many mutations. (…)
A separate lab test by virologist Sandra Ciesek of the University Hospital Frankfurt painted a somewhat bleaker picture.
Exposing the blood of vaccinated individuals to different virus variants, she found that the ability to mount an antibody response to Omicron in people who had three shots of BioNTech/Pfizer was up to 37 times lower than the response to Delta.
An antibody response to Omicron half a year after a two-shot regimen of Pfizer/BioNTech, Moderna or a mixed course of AstraZeneca/BioNTech was not even measurable, Ciesek added. (…)
“The set of data underscores that it makes sense to develop a vaccine that is adapted to Omicron,” Chiesek tweeted, adding that no conclusion could be drawn about protection against severe disease. (…)
There is not significant data yet on how vaccines from Moderna (MRNA.O), Johnson & Johnson (JNJ.N) and other drugmakers hold up against the new variant. (…)
But this morning:
Pfizer, BioNTech Say Third Dose Neutralizes Omicron Variant
Pfizer Inc. and BioNTech SE said initial lab studies show a third dose of their Covid-19 vaccine neutralizes the omicron variant, results that will accelerate booster shot drives around the world.
A booster with the current version of the vaccine increased antibodies 25-fold, providing a similar level as observed after two doses against the original virus and other variants, the companies said Wednesday. (…)
“It’s clear from these preliminary data that protection is improved with a third dose,” Pfizer Chief Executive Officer Albert Bourla said in a statement. The initial data show a third dose could offer still offer enough protection from disease, BioNTech CEO Ugur Sahin said. (…)
And from Dr. Katelyn Jetelina
Omicron: We’re getting (some) answers
Our first Omicron lab study was released today. A group of South African scientists, led by Dr. Alex Sigal, mixed a live virus with blood samples of 6 people who had 2 doses of Pfizer. They also mixed the virus with blood samples of 6 people with the 2-dose series and a previous infection. (South Africa has not authorized boosters yet, but this is a good proxy).
In order to assess vaccine “effectiveness,” the scientists counted the number of neutralizing antibodies that attached to Omicron. Neutralizing antibodies play a significant role in our protection against infection, as they quickly recognize the virus and destroy it. Importantly, the virus is destroyed before entering cells and, thus, cannot replicate. Because it can’t replicate, the person doesn’t get infected and doesn’t get disease (i.e. symptoms). The more neutralizing antibodies we have the better.
In this study, the scientists assessed how Omicron enters our cells and how many antibodies respond to Omicron compared to the original SARS-CoV-2 virus. What did they find?
The virus is using the same door into our cells (called ACE2 receptors) as before. This is very good news because it means our tools (like vaccines) are still useful. If the virus found a different door, this may not have been the case.
The virus is making a smarter key to that door. (…)
Among people with the 2-dose Pfizer series (orange dots), neutralizing antibodies took a significant hit —40 fold reduction— with Omicron compared to the original virus. This is far higher than we’ve seen with any previous variants of concern (Delta had a 5 fold decrease; Beta had a 8 fold decrease). But, honestly, Omicron’s decrease is not as bad as some expected.
Among people with the 2-dose series + previous infection (green dots), neutralizing antibodies took a hit from Omicron but are still relatively high.
This means we’re going to see an increase in breakthrough cases, especially among those with 2 vaccines. But this study gives me great hope that our boosters will help protect against Omicron. In addition, and importantly, neutralizing antibodies are not our only defense. We have other antibodies, B-cell factories, and T-cells (I explained them here) that will also help protect against severe disease and death. It will take time and more data to determine if we need an Omicron-specific booster. (…)
The R(t)—a measure of contagiousness— in South Africa is holding steady at an incredibly high rate: R(t)= 2-3. (…) This means that there’s far less in Omicron’s way, like immunity, than before. This makes sense now with the lab data.
There was hope that Omicron might not spread as fast in Europe or the States. We wouldn’t necessarily see the same rate of spread as in South Africa because high rates of Delta and vaccination would be in Omicron’s way.
We’re starting to get data from the UK and it’s really not looking good. On Dec. 2, 2% of their PCR swabs were positive for Omicron. This is compared to less than 0.01% positive PCRs on Nov 20. Mathematical models estimated an R(t) of 3.47 in the UK right now. This is likely an overestimation, but even the best case scenario (i.e. lower bound) of the R(t) is concerning at 2.75. This tells us that high levels of Delta and/or immunity are not stopping Omicron in the UK. And it probably won’t stop Omicron in the United States either. We need to continue to watch this, but this is not a great start at all.
Omicron is causing a lot of infection very quickly across different landscapes. But infection is very different than severe disease or death. So, what’s happening to people that do get infected?
In Gauteng, hospitalization of COVID19 cases in South Africa’s epicenter is increasing exponentially. And it looks like it’s accelerating at the same rate as previous waves.
Weekly Hospital Admissions in Gauteng (log scale) from the Financial Times
But a report from one of these hospitals provided more context about individual hospitalizations over the weekend. Among a sample of 42 COVID patients in the hospital on Dec. 2, most were hospitalized “with COVID19” not “for COVID19.” Among the 42 patients, 9 (21%) had a diagnosis of COVID19 pneumonia. Among the 9 pneumonia patients, 8 were unvaccinated and 1 was a child. There were 4 patients in high care and 1 in the ICU.
This is a very important on-the-ground perspective. But it is still a very small piece of the puzzle. It is far too early to conclude that Omicron is mild; there are a variety of factors tangled up with each other:
Are we seeing mild cases because vaccines are working or because Omicron is a less severe disease? We can have a virus that leads to mild cases, but isn’t less severe.
Are the majority of cases mild because South Africa has a relatively younger population than, for example, the United States? Extrapolating real-world data from one place to predict how we will do in another place is not straightforward.
Is Omicron growing too quickly, so we don’t have enough data yet? This may seem counterintuitive, but in a fast-growing epidemic, the proportion of cases is actually smaller than the proportion of cases in a slower growing epidemic. I tried to show this phenomenon in the figure below. At the same point in the wave, the proportion of Delta cases (orange highlight) was far higher than the proportion of Omicron cases (green highlight). This factor alone could cause an unusually low proportion of hospitalizations at first. We have to see what happens when this denominator gets bigger and bigger.
We may already be seeing this in the data, too. The acceleration of patients in the ICU and ventilators is faster than the previous Delta wave.
We are also mixing individual-level implications with population-level implications. Immunity may largely protect us against Omicron. But people do still end up in the hospital. Four out of 42 patients (9%) in the South Africa hospital needed intensive care. A small percentage can add up quickly when we are talking about an incredibly fast virus moving through 330,000,000 people in the United States.
And finally, something that I haven’t even see get mentioned is morbidity. Long COVID is less prevalent among vaccinated (see my previous post here), but it does still happen. Just ask anyone with long COVID. You don’t want it.
Differentiating all these factors is incredibly important to determining whether Omicron is more severe. Untangling will take time. And we haven’t had that time yet.
Bottom LineThere’s a good chance Omicron will outcompete Delta in the United States. This coupled this with the high unvaccinated rate and lab data showing partial vaccine immunity will result in a substantial Winter wave. The rate of breakthrough cases will be higher, but I’m hopeful that boosters will largely keep people out of the hospital.
We’re all exhausted. The scientists. The healthcare workers. The parents. The pharmacists. The teachers. Everyone. But the virus isn’t. And it won’t be until we all take it seriously. Wear a good mask. Ventilate spaces. Test, test, test. And, for the love of all things, go get your vaccine and/or booster.
Love, YLE
A few random notes:
The U.S. Chambers of Commerce invited me back to answer more Omicron questions on Thursday at 4pm Eastern. Register here. It will be recorded, too.
Those looking for a good mask can start here— a fantastic database of masks tested for effectiveness. Here is the kids’ mask database.
Yes, antigen tests work against Omicron. They test for another part of the virus—they do not test against the spike protein. They still work, so please use them.
