US First-Quarter Productivity Strongest Since 2014, Labor Costs Subdued

Monday, May 06, 2019

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U.S. worker productivity increased at its fastest pace in more than four years in the first quarter, depressing labor costs and suggesting inflation could remain benign for a while.

The report from the Labor Department came on the heels of data this week showing moderate wage growth in the first quarter and a key inflation measure posting its smallest annual gain in 14 months in March.

The Federal Reserve held interest rates steady and signaled little desire to adjust monetary policy anytime soon. Fed Chairman Jerome Powell told reporters the moderation in price pressures was likely due to transient factors, and predicted inflation would rise back to the U.S. central bank’s 2 percent target.

“The rebound in productivity is restraining labor costs and keeping inflation in check,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “The improved production of workers more than offset the moderate gain in wages.”

Nonfarm productivity, which measures hourly output per worker, increased at a 3.6 percent annualized rate in the last quarter. That was the strongest pace since the third quarter of 2014. Data for the fourth quarter was revised down to show productivity rising at a pace of 1.3 percent instead of the previously reported 1.9 percent rate.

Economists polled by Reuters had forecast first-quarter productivity would advance at a 2.2 percent rate. The acceleration in productivity was flagged by a surge in gross domestic product growth in the January-March period. The economy grew at a 3.2 percent rate in the first three months of the year after expanding at a 2.2 percent pace in the fourth quarter.

Some economists believed the surge in productivity was partly driven by a 35-day partial shutdown of the federal government, which led to hours worked in the first quarter rising at their slowest pace in more than three years.

As such, they continued to estimate the speed at which the economy can grow over a long period without igniting inflation between 1.7 percent and 2.0 percent.

“One quarter does not make a trend, and we do not expect productivity growth to be sustained at the current level, but a gradual shift towards 1.5-2.0 percent seems plausible to us,” said Blerina Uruci, an economist at Barclays in Washington.

U.S. stocks were trading lower and yields on U.S. Treasuries were higher. The dollar rose slightly against a basket of currencies.

Muted Inflation

Compared to the first quarter of 2018, productivity increased at a rate of 2.4 percent, the best performance since the third quarter of 2010. The strong pace of productivity suppressed growth in labor costs, a boost for corporate profits.

Unit labor costs, the price of labor per single unit of output, fell at a 0.9 percent rate in the first quarter after increasing at a 2.5percent rate in the prior quarter. Compared to the first quarter of 2018, labor costs grew at a 0.1 percent rate, the weakest pace since the fourth quarter of 2013.

The government reported earlier this week that the personal consumption expenditures (PCE) price index excluding the volatile food and energy components increased 1.6 percent in the year to March, the smallest rise since January 2018, from 1.7 percent in February. The so-called core PCE index is the Fed’s preferred inflation measure.

Other data this week showed wages and salaries rising 0.7 percent in the first quarter after gaining 0.6 percent in the prior period. Wage inflation remains moderate despite a tight labor market and anecdotal evidence of worker shortages.

A second report from the Labor Department showed initial claims for state unemployment benefits were flat at a seasonally adjusted 230,000 for the week ended April 27, the Labor Department said. Claims surged 37,000 in the prior week, which was the largest rise since September 2017.

Economists polled by Reuters had forecast claims would fall to 215,000 in the latest week. Claims have been volatile in recent weeks because of the different timings of the Easter and Passover holidays as well as school spring breaks. A strike by workers at Stop & Shop supermarkets in New England, which has since ended, likely contributed to the recent jump in claims.

Despite the recent increase in claims, the labor market remains strong, the recent employment report for April expected to show another month of solid job growth.

According to a Reuters survey of economists, nonfarm payrolls probably increased by 185,000 jobs in April after rising by 196,000 positions in March. The unemployment rate is forecast to be unchanged at 3.8 percent in April.

A third report from the Commerce Department showed factory orders rebounded 1.9 percent in March, boosted by strong demand for transportation equipment as well as computers and electronic products. That was the largest rise since August 2018 and followed a 0.3 percent drop in February.

Source: Reuters

Category: Economic News