U.S. productivity declines more than forecast, labor costs climb

U.S. worker productivity declined in the first quarter by more than forecast and labor costs accelerated, underscoring a challenging inflation fight for the Federal Reserve.

Productivity, or non-farm business employee output per hour, decreased at a 2.7% annual rate in the first quarter, according to figures out Thursday from the Bureau of Labor Statistics. That was the first drop in three quarters and compared with a 1.6% advance in the final three months of 2022.

Unit labor costs, or what a business pays to produce one unit of output, increased at a 6.3% rate after rising 3.3% in the prior period. While hours worked picked up and compensation continued to grow, output nearly stagnated.

The median estimates in a Bloomberg survey of economists called for a 2% decrease in productivity and a 5.5% advance in labor costs.

Firms often adopt new technologies or invest in equipment to improve worker efficiency and help offset the inflationary impact of higher wages and other costs. Such investment—whether in equipment or intellectual property products—has been strong through much of the last two years, but mounting economic head winds have led some businesses to pull back.

Quarterly productivity figures are extremely volatile, but if the latest decline is sustained, it risks keeping inflationary pressures elevated.

Thursday’s report showed hourly compensation increased 3.4%. Adjusted for inflation, however, it fell 0.3%.

Hours worked increased 3%, the most in a year, while non-farm business output grew just 0.2%. That measure accounted for about three-quarters of gross domestic product in 2022.

Other data recently have showed labor-cost pressures remain firm. The employment cost index, a broad gauge of wages and benefits, picked up in the first quarter. Meanwhile, GDP—a key gauge of economic activity—moderated to an annualized 1.1% pace, weakness that in part reflects an inventory drawdown.