U.S. productivity rose faster than expected in the first three months of the year, as employers continued to squeeze existing workers to boost output before hiring new ones, Labor Department figures showed today (Thursday). But the rate of growth slowed, which may force businesses to increase hiring in the coming months.
Separately, fewer Americans filed claims for unemployment benefits for the third consecutive week, in a sign the labor market is slowly recovering from the worst recession since the 1930s.
Productivity rose at a 3.6% annual rate in the first quarter, exceeding the 2.6% median forecast of economists surveyed by Bloomberg News but down sharply from 6.3% in the previous three months.
The increase in productivity last quarter was the smallest in a year. Productivity advanced 6.3% over the past four quarters, the biggest 12-month increase since 1962.
The slowing growth of productivity on a quarterly basis provides evidence companies may need to increase hiring to maintain output and meet growing consumer demand.
"This is the tail end of the surge in productivity," Christopher Low, chief economist at FTN Financial in New York, who projected productivity would grow 3.5%, told Bloomberg. "Companies will not be able to squeeze as much out of the workforce as before."
In another sign that companies are reaching their limits of efficiency, unit labor costs, which are adjusted for productivity, dropped at a 1.6% pace last quarter after a 5.6% decrease the previous three months.
Labor expenses, which account for about two- thirds of the cost of producing a good or service, is a key gauge of inflation. The lack of wage pressures gives the Federal Reserve plenty of wiggle room to keep interest rates at unprecedented lows around zero.
Productivity, or output per hour worked, usually picks up sharply at the end of recessions and then eases off as businesses start hiring and increasing work hours to meet demand.
Alan Ruskin, a strategist at RBS Securities told the Financial Times the figures suggest "a slow shift toward hiring as firms lack the capacity to extract more output out of existing workers."
The Labor Department said in its weekly report that initial claims for jobless benefits declined by 7,000 to 444,000 in the week ended May 1. Economists surveyed by Dow Jones Newswires had predicted initial claims would fall by 8,000.
Total claims lasting more than one week also fell.
The report also showed that the four-week moving average, which smoothes out volatility in the data, fell for the week ended May 1. The Labor Department said the four-week moving average went down by 4,750 to 458,500 from the previous week's revised average of 463,250.
Claims have resumed their downward trend in recent weeks after unexpectedly surging upwards in early April. Labor Department economists said the increases did not reflect more layoffs, but instead were caused by holiday and seasonal factors.
"Claims will need to break through 400,000 in order for us to be confident that the economy can generate triple-digit job gains on a sustainable basis," Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York, wrote in a note to clients. "We expect claims to breach 400,000 by the end of May, but in order for this to occur the pace of improvement will need to increase."
After slashing 8.4 million employees from payrolls during the recession that began in December 2007, employers need to add workers to meet the pickup in demand. The U.S. economy expanded at a 3.2% annual rate last quarter, capping the biggest six-month gain since 2003.
Some analysts believe that when the Labor Department releases its monthly jobs report tomorrow (Friday), it will show an increase of 180,000 in nonfarm payrolls. But experts also expect the unemployment rate to remain at 9.7%.
"The pace of hiring is picking up," Low said, "The labor market is recovering, but not fast enough to make anyone happy."
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U.S. Economy: Productivity Holds Up, Jobless Claims Decrease - Financial Times:
US productivity growth slows in first quarter