Worker Productivity Plunges in 1Q; Weekly Jobless Claims Fall

Before you go, we thought you'd like these...
Before you go close icon
In this April 2, 2015, photo, a crowd gathers for a huge 15-county job fair at The Colonnade in Ringgold, Ga. The Labor Department releases weekly jobless claims on Thursday, June 4, 2015. (Dan Henry/Chattanooga Times Free Press via AP) THE DAILY CITIZEN OUT; NOOGA.COM OUT; CLEVELAND DAILY BANNER OUT; LOCAL INTERNET OUT
Dan Henry/Chattanooga Times Free Press via AP
By Lucia Mutikani

WASHINGTON -- U.S. nonfarm productivity fell more sharply than initially thought in the first quarter, leading to a jump in labor-related production costs, a trend that could ignite inflation if sustained.

Other data Thursday showed the labor market tightening, with first-time applications for unemployment aid falling slightly more than expected last week and the number of people on benefit rolls hitting the lowest level since 2000.

The data likely keep the Federal Reserve on track to raise interest rates later this year.

Productivity fell at a 3.1 percent annual rate instead of the previously reported 1.9 percent pace, the Labor Department said. That was the first back-to-back fall in productivity since 2006.

U.S. stock index futures and the dollar trimmed losses after the data. Prices for U.S. Treasuries were slightly higher.

The productivity decline mirrors the economy's dismal performance in the first quarter, when output contracted at a 0.7 percent rate.

Given that temporary factors contributed to the decline in output, the drop in productivity could be overstated and a rebound is likely in the second half of the year.

Still, weak productivity suggests that the economy's potential growth could be lower than the 1.5 percent to 2 percent pace economists currently estimate.

Economists also say muted productivity growth, if sustained, raises the risk of a faster pick-up in inflation that would require more aggressive interest rate increases than the Federal Reserve and financial markets currently anticipate.

Productivity rose only 0.3 percent from a year ago. Workers put in slightly fewer hours in the first quarter than previously estimated. Hours increased at a 1.6 percent rate instead of the previously reported 1.7 percent pace.

With output declining at a 1.6 percent pace, unit labor costs increased at an upwardly revised 6.7 percent rate in the first quarter, the fastest pace since the first quarter of 2014.

Benign Inflation

Unit labor costs, the price of labor for each single unit of output, were previously reported to have increased at a 5 percent rate. Unit labor costs rose at a 1.8 percent pace compared to the first quarter of 2014, a sign that wage inflation is benign for now.

Compensation an hour increased at a 3.3 percent rate in the first quarter of 2015, instead of the previously reported 3.1 percent pace. Wage growth looks set to pick up as the labor market tightens.

In another report, the Labor Department said Initial claims for state unemployment benefits dropped 8,000 to a seasonally adjusted 276,000 for the week ended May 30. It was the 13th straight week that claims held below the 300,000 threshold, which is usually associated with a strengthening labor market.

Economists had forecast claims falling last week to 279,000.

The tightening jobs market underscores the economy's solid fundamentals even though growth is struggling to regain steam after output contracted in the first quarter.

The economy got off to slow start in the second quarter in part because a strong dollar and spending cuts in the energy sector constrained manufacturing activity.

There are, however, signs of some pick-up, with data this week showing a surge in automobile sales in May and gains in factory activity last month for the first time since November. In addition, the trade deficit narrowed sharply in April and construction spending hit its highest level since November 2008.

Last week's claims report has no bearing on May's employment report, which is due for release on Friday, as it falls outside the survey period.

Still, the claims data suggest another month of solid job growth. According to a Reuters survey of economists, nonfarm payrolls likely increased 225,000 last month after rising 223,000 in April.

Thursday's claims report showed the number of people still receiving benefits after an initial week of aid fell to its lowest level since November 2000.

10 PHOTOS
9 Numbers That'll Tell You How the Economy's Really Doing
See Gallery
Worker Productivity Plunges in 1Q; Weekly Jobless Claims Fall
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
HIDE CAPTION
of
SEE ALL
BACK TO SLIDE
SHOW CAPTION
Read Full Story

From Our Partners