Productivity Healthy, Unit Labor Costs Decelerate, Wholesale Inventories at New Record Low as Sales Surge Most Since 2004

- Preliminary 2Q Non-farm Productivity rose 2.2% versus estimates of a 2.5% increase and a 2.6% gain in 1Q.

- Preliminary 2Q Unit Labor Costs rose 1.3% versus estimates of a 1.4% gain and a 2.5% rise in 1Q.

- Wholesale Inventories for June rose 1.1% versus estimates of a .6% rise and a .9% increase in May.

BOTTOM LINE: Worker productivity in the US grew at a healthy rate in the second quarter and unit labor costs decelerated, Bloomberg reported. Usually, productivity growth suffers during energy spikes. The fact that productivity growth remains strong is a large positive. Unit Labor Costs, which make up about two-thirds of inflation, rose 1.3% during 2Q versus the long-term average of a 3.3% increase. Investors’ long-term inflation expectations continue to fall rapidly. I expect productivity to remain healthy and unit labor costs to remain low over the intermediate-term.

Inventories at US wholesalers rose faster than forecast in June, led by gains in stockpiles of higher-priced petroleum, farm goods and metals, Bloomberg said. Despite a 4.7% decline in vehicle sales, Wholesale Sales surged 2.8% in June, the most since March 2004, after a strong 2.2% increase in May. Distributors had enough supplies on hand to last 1.06 months at the current sales pace, a new record low, versus 1.08 in May. Inventories of computer equipment fell 1.2% in June and machinery stockpiles fell .3%. Companies pared inventories in 2Q at a $62 billion annual pace, the fastest drawdown since 4Q 2001. The US economy grew at a 1.9% pace during 2Q despite the fact that falling inventories reduced growth by 1.9 percentage points. Inventory rebuilding should add meaningfully to 3Q/4Q US growth as sales remain healthy on the substantial fall in food and energy prices.