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Editor's note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more.

CHART OF THE DAY: Why Productivity ↓ = Real Earnings ↓ - 5 5 cod

"... There also exists some equally relavant but less direct associations to the deceleration in employment growth.

  • As the Chart of the Day below illustrates,  while employment growth is slowing it is still rising at a premium to output growth …
  • Employment Growth > Output Growth:  Employment growing faster than output is a different way of saying that productivity is declining and unit labor costs are rising which, in turn, serves as a drag on Profitability …
  • Input Costs > Output Prices:  If the price to produce something (unit labor costs) is growing faster than the price at which that something can be sold (implied by the GDP deflator) then margin pressure will remain ongoing.  In a situation of slack demand and declining productivity, employment gains are somewhat bittersweet.  A rising employment-to-population ratio is largely paid for via margin compression … which then (unsurprisingly) manifests in the much discussed crescendo of companies reporting adjusted, non-GAAP earnings in an attempt to mask the more dour underlying reality.    
  • Productivity ↓ = Real Earnings ↓:  Over the longer-term the trend in productivity drives the trend in real earnings growth.  Recall, real earnings are earnings measured in units of goods and services and the more goods and services each person can produce (i.e. productivity) the more each person can consume.  Declining profitability and productivity can function in a negative self-reinforcing fashion.  Declining profitability disincentivizes business from both hiring and investing and protracted underinvestment will curtail gains in productivity."