US nonfarm productivity fell less sharply than previously thought in the first quarter, but labour-related costs still surged as companies employed more workers to boost output.
The Labor Department said yesterday productivity, which measures hourly output per worker, contracted at an annualised rate of 0.6%, instead of the 1.0% pace reported last month.
The revision, which reflected modestly higher output than previously estimated, was in line with economists’ expectations.
Productivity fell at a 1.7% rate in the fourth quarter.
The government last month raised its first-quarter economic growth estimate to a 0.8% rate from the 0.5% pace reported in April.
US financial markets were little moved by the report.
Productivity, which has only increased in two of the last six quarters, rose at a 0.7% rate compared to the first quarter of 2015.
The weakness in productivity partially explains the divergence between the economy’s anaemic performance at the start of the year and a fairly strong labour market, marked by average monthly job gains of 196,000 in the first quarter.
Some economists have attributed the weak productivity to the changing industry mix, which has seen a shift from manufacturing and energy toward the production of services.
Productivity increased at an annual rate of less than 1.0% in each of the last five years, suggesting the economy’s potential rate of growth has declined.
That would imply the spare capacity in the economy is being squeezed out more quickly than thought and that inflation pressures may take hold a bit faster than had been anticipated.
“The slower pace of productivity gains in recent years suggests the economy’s potential rate of growth has fallen,” said Sam Bullard, a senior economist at Wells Fargo in Charlotte, North Carolina.
“Thus, even with economic growth of around only 2% for the remainder of the year, inflation is likely to rise if corporations aim to maintain margins.”
Unit labour costs, the price of labour per single unit of output, increased at a revised 4.5% pace in the first quarter.
They were previously reported to have advanced at a 4.1% rate.
Fourth-quarter unit labour costs were revised to show a 5.4% rate of increase, the fastest rate since the fourth quarter of 2014, instead of 2.7%.
Despite the upward revision, the trend in labour cost increases remains moderate.
Unit labour costs increased at a 3.0% rate compared to the first quarter of 2015.
Hourly compensation per hour increased at an upwardly revised 3.9% rate in the first quarter instead of the previously reported 3.0% pace.