U.S. Productivity Fell in the First Quarter -- Update

By Jeffrey Sparshott Features Dow Jones Newswires

The productivity of U.S. workers decreased in the opening months of the year, underscoring one of the key challenges to faster economic growth.

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Productivity, or how many goods and services U.S. workers produced per hour, fell at an annual rate of 0.6% in the first quarter of 2017 from the prior three months, the Labor Department said Thursday. That was the worst performance in a year.

"The trend in productivity has been very soft in recent years and we are pessimistic about prospects for a meaningful pickup," Daniel Silver, economist at J.P. Morgan Chase, said in a note to clients.

Unit labor costs -- a measure of wages and benefits for U.S. workers -- grew at a 3.0% rate in the first quarter compared with the prior three months.

The mix of weak productivity and rising labor costs clouds the broader economic outlook.

Productivity is the most important factor affecting Americans' living standards. When businesses are more productive, they can generate higher profits, invest and raise workers' pay. That allows wages to rise without generating excessive inflation.

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If productivity remains low and labor costs rise, inflation pressures would increase. That could give the Federal Reserve less leeway on interest rates.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said unit labor costs increases tend to lead core consumer price inflation. "The message from these data is that any further acceleration in [unit labor costs] would be a threat the Fed could not ignore," he said.

Some economists, though, see signs of improving productivity. Year over year, the measure has increased by 1.1% for two consecutive quarters. That is a marked improvement from readings near or below zero but well off the post-World War II average of 2.1%.

Weak business spending on buildings and equipment -- the kinds of projects that make companies more efficient -- could be one factor behind tepid productivity gains. First-quarter data suggest a potential turnaround, with such spending growing at the fastest pace since late 2013.

From January through April of this year, the manufacturing sector expanded at a faster pace than at any point in the prior two years, according to a separate survey of manufacturing purchasing managers by the Institute of Supply Management.

Gross domestic product also is expected to rebound after a particularly poor first quarter. Stronger economic growth would feed through to productivity, helping second-quarter figures.

"A well-designed tax reform package that provides incentives for investment along with some much-needed regulatory relief could boost efficiency gains, but for the moment we remain stuck in the low productivity growth -- and therefore low potential GDP growth -- world," said Stephen Stanley, chief economist at Amherst Pierpont Securities.

Write to Jeffrey Sparshott at jeffrey.sparshott@wsj.com

(END) Dow Jones Newswires

May 04, 2017 12:08 ET (16:08 GMT)