Brian Bethune, U.S. economist at Global Insight, said the BLS labour costs figures are substantially revised in both the final report and even afterwards, whereas the productivity numbers speak for themselves. He said the story is that productivity continues to advance even while the economy slows down, which he called "an amazing feat," attributing the growth to work hours being adjusted downward.

In Q4 2007, U.S. unit labour costs increased at an annual rate of 2.6%, the highest rate since Q1 2007, while nonfarm productivity increased by 1.9% annually, the lowest level since Q4 2007. Hourly compensation increased at an annual pace of 4.6% in Q4, the highest rate since Q1 2007, but real hourly compensation fell 0.5%.

Forecasts for unit labour costs in Q1, which account for over two-thirds of all business expenses, range from 1.5% to 4.5%.

On the higher end, economists from JPMorgan said unit labour cost growth is expected to have accelerated to 3.8% in Q1 from 2.6% in Q4.

"Trends in the year-over-year growth rates will have been the reverse, however. Year-over-year productivity growth likely picked up to 3.1% from 2.9%, and unit labor cost growth likely fell to 0.6% from 0.9%. Those would be both the highest reading on productivity and the lowest reading on unit labor costs since Q2 2004," they wrote.

Economists from Lehman Brothers said, "The moderation in unit labor cost growth should put downward pressure on inflation, and helps explain the modest pass-through of commodity price increases into core inflation in recent years."

Forecasts for nonfarm productivity, the most important determinant of long-term health in the economy, range from as low as 0.5% to as high as 2.5%.

"As productivity growth is simply the difference between output and hours growth, a decline in hours worked tends to raise productivity," explained economists from Lehman Brothers.

Hourly compensation growth was "relatively strong during the quarter, rising an expected 5.6% quarter over quarter," they added. "As a result, unit labour costs likely rose by 3.5% quarter over quarter, lowering the year-over-year rate to just 0.5%."

Economists from Desjardins added that "labour productivity had already slowed in the final quarter of 2007, increasing by only 1.9% following a much bigger 6.3% gain the previous quarter."

They look for only slight growth in productivity in Q1, predicting that "the expected 1.1% gain will in fact primarily come from a substantial drop in hours worked, given the many job losses recorded in the first few months of the year."

Bethune said "cyclical forces are keeping productivity growth down" and year-over-year unit labour costs are "growing about 0.5%," while the quarter-to-quarter gain should be 2.6%.

Looking ahead to the second quarter, economists from BBVA expect productivity to "decelerate significantly or even decrease in the second quarter due to output contraction . . . and mild job losses."

By Patrick McGee, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Cristina Markham, This email address is being protected from spam bots, you need Javascript enabled to view it