Great Reboot

U.S. first quarter productivity rise fastest since 2014; labor costs fall

WASHINGTON, (Reuters) - - 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.

FILE PHOTO: Sub-assembly worker Joel Dykema works on the sub-assembly of a transformer in the RoMan Manufacturing plant in Grand Rapids, Michigan, U.S. December 12, 2018. REUTERS/Rebecca Cook/File Photo

The Labor Department said on Thursday 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.

The trend in productivity is improving. 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 potential boost to 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 2.5 percent 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. Weak unit labor costs came on the heels of a report on Tuesday showing wages increasing steadily in the first quarter despite a tightening labor market.

The Federal Reserve on Wednesday held interest rates steady and signaled little desire to adjust them 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. A key inflation measure tracked by the Fed increased 1.6 percent in the year to March, the smallest gain in 14 months.

In the first quarter, hourly compensation increased at a 2.6 percent rate, slowing from the fourth quarter’s brisk 3.9 percent pace. Hourly compensation increased at a 2.5 percent rate compared to the first quarter of 2018.

Reporting by Lucia Mutikani Editing by Paul Simao