U.S. productivity fell even more than previously thought in the January-March period while labor costs rose at a faster pace.
Productivity, the amount of output per hour of work, declined at an annual rate of 3.2% in the first quarter, the weakest showing since the beginning months of the recession in 2008, the Labor Department reported Wednesday. Unit labor costs rose at a 5.7% rate, the fastest pace in more than a year.
Rising labor costs and falling productivity can be a cause for concern if they are an indication that inflation is worsening. But the first-quarter performance was seen as a temporary bump caused by an unusually harsh winter that caused the economy to go into reverse. A strong rebound is expected in the current quarter.
Initially, the government reported that productivity fell at a smaller 1.7% rate in the first quarter. The initial estimate put the rise in labor costs at a 4.2% rate.
The reason the numbers were revised was that the economy's overall output in the first quarter, as measured by the gross domestic product, was revised sharply lower. Instead of the GDP growing at a tiny 0.1% rate in the January-March period, the government reported last week that the economy actually shrank, falling at a 1% rate.
Analysts believe overall GDP will bounce back in the current April-June period and they also are looking for productivity to recover as well.
The Federal Reserve keeps close watch on productivity and labor costs for any signs that inflation is threatening to rise to an unacceptable rate. But economists say the Fed will see the first-quarter weakness in productivity and rise in labor costs as temporary developments reflecting the harsh winter rather than an indication of the start of a worrisome trend.
Even with the first-quarter spurt in labor costs, overall wage pressures remain mild, reflecting the long period it has taken the economy to regain the millions of jobs lost during the Great Recession.
Economists are looking for a rebound in economic growth in the April-June quarter to around 3.8% as warmer weather boosts consumer spending.
They expect further job gains will lift incomes and spur consumer spending in the second half of the year when they are forecasting the economy will be growing at a solid annual rate of around 3%.