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US productivity plunges in Q1; unit labour costs surge

[WASHINGTON] US nonfarm productivity fell more sharply than previously thought in the first quarter, leading to a jump in labour-related production costs, a trend that could spur a rapid increase in inflation.

Productivity dropped at a 3.1 per cent annual rate instead of the previously reported 1.9 per cent rate, the Labour 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 per cent rate.

The decline mirrors the economy's dismal performance in the first quarter, when output shrunk at a 0.7 per cent 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 per cent to 2.0 per cent 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 per cent from a year ago. Workers put in slightly fewer hours in the first quarter than previously estimated. Hours increased at a 1.6 per cent rate instead of the previously reported 1.7 per cent pace.

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

Unit labour costs, the price of labour per single unit of output, were previously reported to have increased at a 5.0 per cent rate. Unit labour costs rose at a 1.8 per cent 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 per cent rate in the first quarter of 2015, instead of the previously reported 3.1 per cent pace.