US Productivity Falls In Q1

U.S. worker productivity decreased for a second straight quarter and employer costs for labor climbed by the most in more than a year.

The measure of employee output per hour fell at a 1 percent annualized rate from January through March after a 1.7 percent decline in the fourth quarter. The median estimate of in a Bloomberg survey was for a 1.3 percent retreat. Labor costs jumped 4.1 percent, more than forecast.

Employers have steadily beefed up headcounts to meet demand even as growth softened the past two quarters. At the same time, they’ve been hesitant to ramp up investments in efficiency-boosting equipment, meaning productivity will likely continue to languish.

“You’ve got strong labor-market data and weak GDP data, and that pretty much by definition is going to translate into soft productivity numbers,” Stephen Stanley, chief economist Amherst Pierpont Securities LLC in New York, said before the report. “You would expect that this would be exactly the time in the expansion when businesses would start to kick into gear with labor-saving investment, and it’s not happening.”

Estimates for productivity in the Bloomberg survey ranged from no change to a 2.4 percent decline. The reading for the prior three months was originally reported as a 2.2 percent decline.

The productivity data showed expenses per worker picked up in the first quarter from a 2.7 percent rate in the final three months of 2015. These so-called unit labor costs, which are adjusted for efficiency gains, were forecast to climb 3.3 percent, according to the Bloomberg survey median.

Hourly Earnings

Adjusted for inflation, hourly earnings increased at a 3.4 percent rate in the first quarter, the most in a year, after rising at a 0.1 percent pace the previous period.

Output advanced at a 0.4 percent rate, the weakest in two years, following a 1.5 percent pace. Total hours worked eased to a 1.5 percent rate from 3.3 percent in the fourth quarter, the figures also showed.

Growth slowed to a crawl in the first quarter. The deceleration came as consumers and companies alike reined in their spending amid weak global financial conditions and a plunge in oil prices.

When that environment is combined with the uncertainty accompanying the election season, the much-needed pickup in business investment is likely to remain elusive, Stanley said. That, in turn, doesn’t bode well for workers’ wages as companies strive to protect profits.

“People’s living standards are derived really more than anything else by the rate of productivity,” Stanley said. “Over time, if productivity growth is lower, then wage growth should be lower as well.”

Some economists have speculated that a measurement issue may be partly to blame, with incremental progress in productivity difficult to capture. If that’s not the case, however, the productivity slide will limit just how fast the economy can grow without stoking inflation.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell