Today the Labor Department's Bureau of Labor Statistics issued its preliminary report on productivity and labor costs for the second quarter.

Today's numbers were not as good as those for the first quarter. Annualized nonfarm business productivity -- the output per hour of all persons -- declined by 0.1 percent from the first quarter to the second. This compares with a 2.0 percent rise between the fourth quarter and the first. Nonfarm business unit labor costs rose by 3.8 percent on an annualized basis compared with a 1.2 percent rise in the preceding quarter.

The annualized nonfarm unit labor cost percentage changes for the past six quarters have been +4.9, +2.3, +2.5, +3.8 , +1.2, and +3.8. So, it looks like there is a lot of quarter-to-quarter variation in this indicator. Perhaps, as we have done with other indicators, we can get a truer picture of what's happening if we look at the change over a year. From the second quarter of 1995 to the second quarter of 1996, nonfarm business unit labor costs rose by 3.1 percent. This compares with an rise of 2.4 percent in the year that concluded at the end of the first quarter.

When I last reported on productivity and unit labor costs (6-19-96) I mentioned that, over the past forty-five years, the year-to-year changes in labor costs and the Consumer Price Index have tended to more or less move up and down at the same time. At the end of June the CPI was up 2.8 percent for the preceding 12 months. Going back to the end of the first quarter, we find that the annual change in the CPI was also +2.8 percent. Thus, from the end of the first quarter to the end of the second quarter, the annual rate of change in unit labor costs rose from 2.4 percent to 3.1 percent while the CPI was unchanged. So, in the short run, it doesn't look like the rise in unit labor costs has been reflected in the rate of inflation at the consumer level.

In other major news today, the Commerce Department's Bureau of the Census released its report on Manufacturing and Trade Inventories and Sales for June.

In yet another sign of slowing economic activity, manufacturing and trade sales fell by 0.5 (+/-0.1) percent during June. This was the first month-to-month drop since March. On a year-over-year basis this indicator rose by 4.4 (+/-0.3) percent, slightly below the 4.5 percent growth rate for all of 1995. Manufacturing and trade sales is one of the four indicators that make up the Department of Commerce Composite Index of Coincident Economic Indicators.

Inventories grew by 0.1 (+/-0.1) percent from May to June and by 2.4 (+/-.03) percent since June of 1995. This year-to-year inventory growth rate has been declining for 11 straight months. So, for nearly a year, producers and distributors have been selling goods faster than they have been stockpiling replacements.

During June, the inventories to sales ratio rose from 1.39 to 1.40, indicating that during that month unsold goods were building up a little faster than goods were being sold.

Apparently, market participants assigned more weight to the declining sales figures than they did to the rise in unit labor costs. At the end of the day, the 30-year T-bond had risen by 6/32 and the Dow Jones Industrial Average had gained 19.60 points.

Pat Lafferty (MF Merlin)

Transmitted: 8/14/96