US productivity plunges in Q1; unit labor costs surge

An employee inspects the wheel well of a BMW X4 SUV at the BMW assembly plant in Greer, South Carolina.
Luke Sharrett | Bloomberg | Getty Images

U.S. nonfarm productivity fell more sharply than previously thought in the first quarter, leading to a jump in labor-related production costs, a trend that could spur a rapid increase in inflation.

Productivity dropped at a 3.1 percent annual rate instead of the previously reported 1.9 percent rate, the Labor Department said on Thursday. That was the first back-to-back fall in productivity since 2006.

Economists polled by Reuters had expected that productivity, which measures hourly output per worker, would be revised to show it falling at a 2.9 percent rate.

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The decline mirrors the economy's dismal performance in the first quarter, when output shrunk at a 0.7 percent rate. Given that temporary factors contributed to the decline in output, the drop in productivity could be overstated and a rebound is likely in the second half of the year.

Still, weak productivity suggests that the economy's potential growth could be lower than the 1.5 percent to 2.0 percent pace that economists are currently estimating.

Economists also say muted productivity growth, if sustained, raises the risk of a more rapid pick-up in inflation that would require more aggressive interest rate increases than the Federal Reserve and financial markets are currently anticipating.

Productivity rose only 0.3 percent from a year ago. Workers put in slightly fewer hours in the first quarter than previously estimated. Hours increased at a 1.6 percent rate instead of the previously reported 1.7 percent pace.

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With output declining at a 1.6 percent pace, unit labor costs increased at an upwardly revised 6.7 percent rate in the first quarter, the fastest pace since the first quarter of 2014.

Unit labor costs, the price of labor per single unit of output, were previously reported to have increased at a 5.0 percent rate. Unit labor costs rose at a 1.8 percent pace compared to the first quarter of 2014, a sign that wage inflation is benign for now.

Compensation per hour increased at a 3.3 percent rate in the first quarter of 2015, instead of the previously reported 3.1 percent pace.