Out of the storm?

Markets around the world rebounded after a turbulent week triggered by a combination of woes in China and negative news regarding economic expansion in the U.S. and elsewhere. Recent economic figures confirm our outlook of a slowdown in the U.S. with a risk that inflation surges. The latest unit labor cost and productivity figures suggest that inflation is far from being tamed considering that labor costs represent more than two thirds of manufacturing costs and that productivity figures are ebbing towards their lowest level in a decade. A surge in unit labor cost is not surprising considering the the advanced stage of the business cycle and the resulting relative tightness of the labor market combined with peak in capacity utilization. Until recently, firms had the margin of maintaining prices steady as productivity gains diluted the effect of rising labor costs, but with the latest development, firms could very well pass on the additional costs to consumers. We think that the programmed slowdown will suffice to counter the inflationary threat in coming weeks and months. This should be confirmed in upcoming employment figures.