In his latest Lunch with Dave note, Gluskin-Sheff's David Rosenberg calls out the big paradox of the economy:

Well, there is such a thing as too much of a good thing. U.S. productivity growth

moderated but not nearly as much as expected in Q1 (remember, the pace of

economic activity moderated too) — to a 3.6% annual rate (the consensus was

expecting 2.6%) versus 6.3% in Q4 and 7.8% in Q3. The message here is that

the recovery is being totally dominated by productivity with very little in the way

of labour input.



Of that 4.4% rise in nonfarm business output in Q1, 80% was accounted for by

productivity growth, not far off what we saw in Q4 (in the current cycle

productivity is accounting for nearly 100% of output growth, compared to 50% in

prior cycles going back to the early 1950s). Real compensation per hour

stagnated in Q1, and this followed outright declines the prior two quarters — a

whole series of other cash flow boosts from extended jobless benefits, to

strategic defaults and tax credits, are helping underpin consumption. Organic

income growth is just not there because of all the slack in the jobs market — that

is so evident in these data.



Unit labour costs fell at a 1.6% annual rate — the third decline in a row and down

now in 4 of the past 5 quarters (-3.7% YoY). This is the dominant factor affecting

the inflation backdrop. Moreover, the price deflator for the corporate sector was

a mere +0.6% at annual rate in Q1 and +0.1% on a YoY basis. In other words,

the corporate sector, notwithstanding the profits rebound, which has been

centered more in financials than in industrials, is 10 basis points shy of outright

deflation.