Wednesday, May 07, 2008

Productivity Surges, Unit Labor Costs Decelerate, Pending Home Sales Decline

- Preliminary 1Q Non-farm Productivity rose 2.2% versus estimates of 1.5% and 1.8% in 4Q.

- Preliminary 1Q Unit Labor Costs rose 2.2% versus estimates of a 2.6% gain and 2.8% in 4Q.

- Pending Home Sales for March fell 1.0% versus estimates of a 1.0% decline and a downwardly revised 2.8% decline in February.

BOTTOM LINE: US productivity unexpectedly accelerated in the first quarter, helping combat inflation, Bloomberg reported. “Unit labor costs have essentially come to a grinding halt and that should support corporate profits and allow businesses to hold the line on prices,” said Mark Zandi, chief economist at Moody’s Unit labor costs account for about two-thirds of the cost of goods and services. Compared with year-ago levels, productivity rose 3.2%, the largest jump in almost four years. Productivity at non-financial corporations, a gauge closely watched by the Fed and reported with a one-quarter lag, rose 1.8% during 4Q. Productivity at manufacturers rose at a 4.1% rate during 1Q. I expect productivity to trend higher and unit labor costs to trend lower through year-end.

Pending home sales came in right at economists’ expectations in March, Bloomberg reported. Pending home resales fell 10.4% in the Midwest, 1.4% in the West and .1% in the South. Pending resales jumped 12.5% in the Northeast. The MBA Mortgage Applications report surged 15.6% this week. The Homebuyer Affordability Index has risen 31% since its low during July 2006. According to, the average 30-year fixed-rate mortgage is falling to 5.77% today, down from 6.38% in June of last year. I still expect home sales to surprise on the upside over the coming months on lower interest rates, lower prices, less extreme economic pessimism and pent-up demand.

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