US productivity drops on weaker output as labour costs jump

US productivity dropped in the first quarter by the most since 1947 as the economy shrank, while labour costs surged and illustrated an extremely tight job market.

Productivity, or nonfarm business employee output per hour, decreased at a 7.5 per cent annual rate from the previous 3 months, according to Labor Department figures on Thursday (May 5). That compared to a 6.3 per cent gain in the fourth quarter and the 5.3 per cent projected decline in a Bloomberg survey of economists. 

While productivity growth rates can be extremely volatile in normal business cycles, the pandemic and subsequent recovery over the past 2 years has made the figures more prone to fluctuations. It is likely to take several more years to gauge whether underlying productivity trends have shifted in the wake of Covid-19.

Hourly compensation rose 3.2 per cent in the period, but with the drop in productivity, unit labour costs climbed at a 11.6 per cent rate in the first quarter. While the quarterly gain in hourly compensation adjusted for productivity likely overstates the degree of wage pressures, the 7.2 per cent annual gain in labour costs was the largest since 1982.

“The trend in unit labour costs is running more than double the Fed’s inflation goal of 2 per cent, signalling inflation pressures persist not only outside the US with elevated commodity prices and still-knotted supply chains, but from within as the US labour market remains exceptionally tight,” Sarah House, senior economist at Wells Fargo, said in a note.

The US economy contracted last quarter for the first time since 2020, largely due to a wider trade deficit as companies imported more goods and services to support robust consumer demand. 

Nonfarm business output as measured by this report, which is about 75 per cent of gross domestic product (GDP), also shrank for the first time in nearly 2 years. That slowdown depressed the government’s measure of productivity growth.

Economic output declined at a 2.4 per cent pace in the first quarter, according to the report. Hours worked, the other input in productivity calculations, increased 5.5 per cent. On a year-over-year basis, output per hour fell 0.6 per cent.

Fierce competition for a limited supply of workers has led businesses to bid up wages to attract and retain talent. By another measure, employment costs are now rising at a record rate. To help limit the impact of rising costs on balance sheets, firms often adopt new technologies or invest in equipment to make their workers more productive. 

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More generally, rising productivity can help offset the inflationary impact of wage increases. 

Despite the rapid increases in wages, though, they are still not keeping up with inflation. Real average hourly compensation fell an annualised 5.5 per cent from the prior quarter after falling 0.5 per cent. BLOOMBERG