US productivity drops in Q1; labour costs jump

US WORKER productivity fell more than expected in the first quarter after growing in the second half of 2022, boosting labour costs, which could see the Federal Reserve keeping interest rates higher for a while.

Nonfarm productivity, which measures hourly output per worker, dropped at a 2.7 per cent annualised rate last quarter, the Labor Department said on Thursday (May 4). Data for the fourth quarter was revised slightly lower to show productivity growing at a 1.6 per cent rate instead of the previously reported 1.7 per cent pace.

Economists polled by Reuters had forecast productivity declining at a 1.8 per cent rate. Productivity decreased at a 0.9 per cent pace from a year ago. That marked the fifth quarter that productivity declined on a year-on-year basis.

Large shifts in the composition of the workforce in the wake of the Covid-19 pandemic have made it difficult to get a clear read of productivity.

Unit labour costs – the price of labour per single unit of output – surged at a 6.3 per cent rate, after increasing at a 3.3 per cent pace in the fourth quarter. Unit labour costs rose at 5.8 per cent rate from a year ago. Labour costs are rising too quickly to be consistent with the US central bank’s 2 per cent inflation target.

The Fed on Wednesday raised its benchmark overnight interest rate by another 25 basis points to the 5.00 per cent-5.25 per cent range on Wednesday, and signalled it might pause the US central bank’s fastest monetary policy tightening campaign since the 1980s.

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Some economists believe an anticipated recession this year could force the Fed to cut rates by December.

Hourly compensation increased at a 3.4 per cent pace last quarter. Compensation advanced at a 4.9 per cent rate in the October-December quarter. It grew at a 4.8 per cent rate compared to the first quarter of 2022. REUTERS