US 1Q productivity fell 1.9 percent vs. 1.8 percent drop expected

Chevrolet Malibu manufacturing production factory
Dave Kaup | Reuters

U.S. nonfarm productivity fell in the first quarter as harsh winter weather weighed on output, pushing labor-related production costs to rise at their quickest pace in a year.

Productivity declined at a 1.9 percent annual rate after dropping at a revised 2.1 pace in the fourth quarter, the Labor Department said on Wednesday. That was the first back-to-back fall in productivity since 2006.

Economists polled by Reuters had forecast productivity, which measures hourly output per worker, dropping at a 1.8 percent rate after falling at a previously reported 2.2 percent rate in the last three months of 2014.

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The drop in productivity, which mirrored an abrupt slowdown in economic growth in the first quarter, is likely to be temporary. Still, the trend remains weak. Productivity rose 0.6 percent from a year ago.

A combination of cold weather, a strong dollar, port disruptions and deep spending cuts by energy companies, held down first-quarter economic growth to a 0.2 percent pace.

A jump in the trade deficit in March, however, suggests the economy actually contracted in the first three months of the year after expanding at a 2.2 percent pace in the fourth quarter.

Despite the weather disruptions, workers put in more hours in the first quarter. Hours increased at a 1.7 percent rate. With hours outpacing a 0.2 percent pace of decline in output, unit labor costs increased at a 5.0 percent rate in the first quarter. That was the fastest pace since the first quarter of 2014.

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Unit labor costs, the price of labor per single unit of output, increased at a 4.2 percent rate in the fourth quarter.

They rose 1.1 percent compared to the first quarter of 2014, a sign that wage inflation remains benign.

Compensation per hour increased at a 3.1 percent rate in the first quarter, also the quickest pace since the first quarter of 2014. Coming n the heels of a report last week showing a solid increase in labor costs in the first quarter, the rise in compensation suggests that wage inflation could be firming.

The steadily rising labor costs against the backdrop of weak productivity could squeeze corporate profits.