Private Payroll Growth Moderates; Productivity Falls

Unemployment Benefits
M. Spencer Green/APA job seeker fills out an application at a job fair last month in Chicago.

By Lucia Mutikani

WASHINGTON -- U.S. private employers in April added the fewest number of workers in more than a year, which could heighten worries about the economy's potential to rebound strongly from a first-quarter slump.

Private payrolls increased 169,000 last month, the ADP National Employment Report showed. That was the fewest since January 2014 and far below economists' expectations for a gain of 200,000 jobs.

March payrolls were revised down to show 14,000 fewer jobs created than previously reported. The report jointly developed with Moody's Analytics was released ahead of the government's more comprehensive employment report on Friday.

While it has a poor track record of predicting nonfarm payrolls, the ADP report poses a downside risk to economists' expectations for nonfarm payrolls growth of 224,000 in April.

Yields on U.S. Treasuries rose and U.S. stock index futures traded slightly higher after the data. The dollar was weaker against a basket of currencies.

A combination of cold weather, a strong dollar, port disruptions and deep spending cuts by energy companies, held down first-quarter economic growth to a 0.2 percent annual pace.

A jump in the U.S. trade deficit in March, however, suggests the economy actually contracted in the first three months of the year after expanding at a 2.2 percent pace in the fourth quarter.

Productivity Drops

In a separate report Wednesday, the Labor Department said nonfarm productivity fell in the first quarter as harsh winter weather weighed on output, pushing labor-related production costs to rise at their quickest pace in a year.

Productivity declined at a 1.9 percent annual rate after dropping at a revised 2.1 pace in the fourth quarter. That was the first back-to-back fall in productivity since 2006.

%VIRTUAL-WSSCourseInline-876%Economists polled by Reuters had forecast productivity, which measures hourly output for each worker, dropping at a 1.8 percent rate after falling at a previously reported 2.2 percent rate in the last three months of 2014.

The productivity drop, which mirrored the abrupt growth slowdown in the first quarter, is likely to be temporary. Still, the trend remains weak. Productivity rose 0.6 percent from a year ago.

Despite the weather disruptions, workers put in more hours in the first quarter. Hours increased at a 1.7 percent rate.

With hours outpacing a 0.2 percent pace of decline in output, unit labor costs increased at a 5 percent rate in the first quarter. That was the fastest pace since the first quarter of 2014.

Unit labor costs, the price of labor for each single unit of output, increased at a 4.2 percent rate in the fourth quarter. They rose 1.1 percent compared to the first quarter of 2014, a sign that wage inflation remains benign.

Compensation an hour increased at a 3.1 percent rate in the first quarter, also the quickest pace since the first quarter of 2014. Coming on the heels of a report last week showing a solid increase in labor costs in the first quarter, the rise in compensation suggests that wage inflation could be firming.

The steadily rising labor costs against the backdrop of weak productivity could squeeze corporate profits.