Featured # Markets | 4 years ago

U.S. Productivity Levels Suggest Rate of Growth in Decline

U.S. non farm productivity dropped less than expected for the first quarter, while labor related costs spiked with company news of employing more workers. The Labor Department said Tuesday that productivity, which is measured by each worker’s hourly output, was contracted to an annualized rate of 0.6 percent, instead of the 1.0 percent that was reported for May. Productivity dropped by 1.7 percent in the fourth quarter last year. The government recently raised its Q1 economic growth estimate from 0.5 to 0.8, as financial markets in the United States were barely affected.

This shortcoming in productivity levels reveals the difference between the weak economic performance in January and the strong labor market, which is marked by an average of 196,000 monthly gains for Q1. Most economists associate the weak productivity with the changing industry mix, an industry that has seen a drastic shift from manufacturing and energy focus to a production of services. Productivity increased by just short of 1.0 percent in each of the past five years. This suggests that the potential rate of growth for the economy is headed towards a decline.

“The slower pace of productivity gains in recent years suggests the economy’s potential rate of growth has fallen,” said senior economist Sam Bullard, of Wells Fargo Charlotte. “Thus, even with economic growth of around only 2 percent for the remainder of the year, inflation is likely to rise if corporations aim to maintain margins.”

The price of labor per single unit of output, called unit labor costs, have risen by 4.5 percent in the past quarter, after previously being reported to have increased at a 4.1 percent rate. Fourth quarter 2015 unit labor costs displayed a 5.4 percent increase, which is the fastest rate since 2014. However even though there was some positive revision, the labor cost increases remain balanced at 3.0 compared to Q1 2015. Hourly compensation per hour also increased, at a steady 3.9 percent, up 0.9 percent from the previous year.

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