KEY DATA: Productivity: -3%; Labor Costs: +4.5%/ Layoffs: 75,114; Jobless Claims: +8,000

IN A NUTSHELL: “It appears that businesses are hiring more but enjoying it less as hours worked were up and worker output down.”

WHAT IT MEANS: When it comes to controlling expenses, it is never good when your labor costs rise a lot faster than your production and that is precisely what happened in the last quarter of 2015. We learned last week that GDP grew tepidly in the fourth quarter despite robust hiring. That translated into a sharp decline in productivity. And with labor efficiencies dropping while wages were rising, labor costs jumped sharply. For all of 2015, productivity was up a tepid 0.6%, which was pretty much where it was in 2014. Meanwhile, labor compensation accelerated to 3% for the year, the greatest increase since 2007. Who said labor costs were not rising? With compensation jumping but output rising slowly, the labor cost of producing goods went up the fastest since 2008. In other words, it was not a very good year for businesses that were trying to control their expenses, but it was a much better year for workers.

Speaking of workers, Challenger, Gray and Christmas reported that layoff announcements soared in January, not just over the month but over the year. There were sharp increases in retail, led by Walmart’s shutting down stores across the country and the world, as well as in the energy sector. Keep in mind, these are announcements, not actual layoffs. For example, Walmart offered many of their workers alternative opportunities, so it is not clear how many will actually lose their jobs. Also, this is for layoffs everywhere in the world. Thus, some of those job losses may not be in the U.S.

Jobless claims popped back up last week and the trend has flattened. It appears that the level may have largely bottomed. Since adjusting for the size of the labor force, claims are still near record lows, it is clear the labor market remains in very good shape.

MARKETS AND FED POLICY IMPLICATIONS: Tomorrow is Employment Friday and we will get a good idea if the economy continued to be a jobs machine in January. The consensus if for something between 175,000 and 200,000, which would be quite good given how oversized the increases were at the end of last year. I think it could be toward the top of the range, but that is nit picking. I also expect the unemployment rate, which has been stuck at 5% for three months, to edge down to 4.9%. Decent job gains and a lower unemployment rate would indicate that the labor market is tight and getting even tighter. They would reinforce the view that labor costs are indeed rising, despite the problems in the manufacturing and energy sectors. That compensation expenses are on the upswing was made clear in today’s productivity report. Still, firms have yet to pass on those higher expenses to the consumer and inflation remains tame. How long that can continue is anyone’s guess, but if productivity remains as low as it has been for the past five years, something will have to give really soon.