U.S. Productivity Contracts in Q1; Labor Costs Rise

U.S. worker productivity unexpectedly fell in the first quarter, leading to a jump in labor-related costs.

The Labor Department said on Thursday that nonfarm productivity, which measures hourly output per worker, decreased at a 0.6 percent annualized rate.

That was the weakest in a year and followed an upwardly revised 1.8 percent pace of increase in the fourth quarter.

The weakness in productivity is in line with a near stall in economic growth at the start of the year. Economists polled by Reuters had forecast productivity unchanged in the first quarter after a previously reported 1.3 percent growth rate in the prior quarter.

Compared to the first quarter of 2016, productivity increased at a 1.1 percent rate, suggesting a gradual improvement in the productivity trend.

Productivity has increased at an average annual rate of 0.6 percent over the last five years, well below its long-term rate of 2.1 percent from 1947 to 2016.

Weak productivity could make it difficult to boost annual economic growth to 4 percent as President Donald Trump has promised. The government reported last week that gross domestic product increased at a 0.7 percent rate in the first quarter, the worst performance in three years.

U.S. jobless claims fall, continuing claims hit 17-year low

U.S. trade deficit improves slightly in March. Some economists believe productivity is being inaccurately measured, especially on the information technology side.

Others blame low capital expenditure, which they say has resulted in a sharp drop in the capital-to-labor ratio.

Unit labor costs, the price of labor per single unit of output, increased at a 3.0 percent pace in the first quarter after rising at a 1.3 percent rate in the fourth quarter.

Compared to the first quarter of 2016, unit labor costs rose at a 2.8 percent rate.


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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