U.S. productivity falls at fastest pace since 1947 and unit-labor costs soar
The numbers: The productivity of American workers and businesses sank at an 7.5% annual pace in the first quarter — the biggest drop since 1947 — in a reflection of ongoing supply shortages and other drags on the economy.
The amount of goods and services produced, known as output, fell at a 2.4% rate in the first three months of the year. Yet hours worked rose at a 5.5% annual rate, the government said Thursday.
Productivity is determined by the difference between output and hours worked.
Unit-labor costs surged at 11.6% annual pace in the first quarter. Over the past year these costs have risen at the fastest clip in 40 years.
Unit-labor costs reflect how much a business pays an employee to produce one unit of output — say a ton of steel or a box of cookies.
Hourly compensation, or the amount of wages and benefits paid to employees, increased by 3.2%.
Yet adjusted for inflation compensation fell 5.5%, underscoring that rising prices are hurting breadwinners. Wages aren’t keeping up with inflation.
Key details: The big drop in productivity in the first quarter was no surprise — Wall Street had forecast a 5.2% decline after a weak report on gross domestic product.
The omicron wave of the coronavirus pandemic also disrupted the economy early in the year, causing millions of people to miss some time at work and forcing businesses to scale back.
Most of the weakness was at service-oriented companies such as retailers and restaurants that tend to suffer during Covid outbreaks.
Productivity at manufacturers, which are more immune, actually rose at a 0.7% rate in the first quarter.
Economists say the sharp decline in productivity is probably exaggerated. The data has bounced up and down over the past few years because of the pandemic.
Over the past four quarters productivity has fallen at a slower 0.6% clip, though it was still the largest decline since 1993.
Big picture: High inflation has driven up the cost of business materials and ongoing supply shortages are limiting what companies can produce.
Workers, for their part, are demanding and receiving more pay amid the biggest labor shortage in decades. So companies are also paying higher labor costs to produce goods and services — and that could also start adding to inflation.
Yet if prices keep rising, something will have to give, economists and business executives say. Profit margins could fall, customers could balk at higher prices and the economy could slow, especially with the Federal Reserve raising interest rates.
High productivity is a sign of a very healthy economy. Falling productivity is usually — but not always —a sign of trouble if it persists for extended periods.
Looking ahead: “The productivity and costs numbers are always volatile but they have been wild since Covid struck, so the noise in each quarterly print overwhelms the signal,” wrote chief economist Ian Shepherdson of Pantheon Macroeconomics in a note to clients.
Market reaction: The Dow Jones Industrial Average
DJIA,
X and S&P 500
SPX,
were set to decline in Thursday trades. Stocks rallied on Wednesday after the Federal Reserve indicated it wouldn’t raise interest rates quite as aggressively as investors had expected.
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