U.S. worker productivity increased at its fastest pace in more than four years in the first quarter, depressing labour costs and suggesting inflation could remain benign for a while.
The report from the Labor Department on Thursday 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 on Wednesday held interest rates steady and signalled little desire to adjust monetary policy any time 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 per cent target.
“The rebound in productivity is restraining labour 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 per cent 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 per cent instead of the previously reported 1.9 per cent rate.
Economists polled by Reuters had forecast first-quarter productivity would advance at a 2.2 per cent 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 per cent rate in the first three months of the year after expanding at a 2.2 per cent 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 per cent and 2.0 per cent.
“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 toward 1.5-2.0 per cent 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 per cent, the best performance since the third quarter of 2010. The strong pace of productivity suppressed growth in labour costs, a boost for corporate profits.
Unit labour costs, the price of labour per single unit of output, fell at a 0.9 per cent rate in the first quarter after increasing at a 2.5 per cent rate in the prior quarter. Compared to the first quarter of 2018, labour costs grew at a 0.1 per cent 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 per cent in the year to March, the smallest rise since January 2018, from 1.7 per cent 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 per cent in the first quarter after gaining 0.6 per cent in the prior period. Wage inflation remains moderate despite a tight labour market and anecdotal evidence of worker shortages.
A second report from the Labor Department on Thursday 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 on Thursday. 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 labour market remains strong, with Friday’s 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 per cent in April.
A third report from the Commerce Department on Thursday showed factory orders rebounded 1.9 per cent 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 per cent drop in February.