U.S. worker productivity fell by the largest amount in a year from January through March. The steeper drop than first estimated suggests companies would need to hire more if demand were to pick up.
The Labor Department said Wednesday that productivity fell at an annual rate of 0.9 per cent in the first quarter. That's faster than the initial 0.5 per cent annual decline for the period estimated last month.
Productivity is the amount of output per hour of work. It fell at a faster rate than first estimated because revisions showed less output and slightly more hours worked.
Labor costs rose 1.3 per cent in the January-March quarter, down from an initial estimate of two per cent. The decline was largely due to smaller compensation costs.
The estimates were the government's second and final look at first-quarter productivity and labour costs.
The faster decline in productivity was expected after the government said last week that the economy grew at an annual rate of 1.9 per cent in the January-March quarter. That was slightly slower than the government's initial 2.2 per cent estimate.
Less productivity hurts profits
Less productivity is bad for corporate profits. But it could be good news for jobseekers. It could show that companies are struggling to squeeze more output from their workers and must hire if demand rises.
Yet so far, companies have signaled a much different message. Employers added just 69,000 jobs in May, the fewest in a year, and just 77,000 in April. That's a sharp decline from the 226,000 jobs created per month in the first quarter.
"Going forward, the big question is the rate of gain in output growth. If it remains slow, as we feel likely, productivity gains will continue to be constrained," said Joshua Shapiro, chief U.S. economist at MFR Inc.
Productivity grew last year at the slowest pace in nearly a quarter century after rising sharply in 2010. The main reason productivity soared in 2010 was that it followed the worst recession in decades, when employers laid off millions of workers.
Economists said the trend is typical during and after a recession. Companies tend to shed workers in the face of falling demand and increase output from a smaller work force. Once the economy starts to grow, demand rises and companies eventually must add workers if they want to keep up.
Economists expect productivity growth will remain weak this year. Economists at JPMorgan are forecasting productivity will rise 0.7 per cent this year as companies add more workers.
With so many people out of work and looking for jobs, there is little chance that wage pressures will get out of hand, economists note.