U.S. Productivity Slowed in First Quarter, Labor Costs Rose

The productivity of U.S. workers slowed in the first quarter and labor costs rose as a growing economy prompted companies to boost employment.

The measure of employee output per hour increased at a 1.6 percent annual rate, exceeding the median forecast of economists surveyed by Bloomberg News, after a 2.9 percent gain in the prior three months, figures from the Labor Department showed today in Washington. Expenses per employee climbed at a 1 percent rate after dropping 1 percent the prior quarter.

Companies may need to keep adding staff and increasing hours after reaching the cap of how much efficiency they could extract from their workforces in the early phase of the recovery. A report tomorrow is projected to show employers in the world’s largest economy hired 185,000 additional workers in April.

“We’re moving to the period where companies are starting to hire more workers as they ramp up output, so productivity growth is settling down,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “We’re going to see solid but not spectacular gains in employment” in coming months, he said.

Economists projected productivity would rise 1.1 percent, according to the median of 68 forecasts in a Bloomberg News survey. Estimates ranged from no change to a 3.1 percent increase.

Unit labor costs, adjusted for efficiency gains, were projected to rise 0.8 percent, according to the survey median.

More Claims

More Americans unexpectedly filed first-time claims for unemployment insurance payments last week, pushed up by three factors that normal seasonal variations failed to take into account, another report from the Labor Department showed today.

Applications for jobless benefits jumped by 43,000 to 474,000 in the week ended April 30, the most since August. A spring break holiday in New York, a new emergency benefits program in Oregon and auto shutdowns caused by the disaster in Japan were the main reasons for the surge, a Labor Department spokesman said as the data was released to the press.

Stock-index futures dropped after the reports. The contract on the Standard & Poor’s 500 Index maturing in June fell 0.6 percent to 1,334.9 at 8:55 a.m. in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 3.18 percent from 3.22 percent late yesterday.

Today’s productivity report showed output rose at a 3.1 percent rate. The increase was led by a 9.7 percent surge among manufacturers that was the biggest since 1994.

Hours Worked

Hours worked climbed at a 1.4 percent pace after a 1.5 percent gain in the prior quarter. Compensation for each hour worked increased at a 2.6 percent annual pace.

Adjusted for inflation, compensation dropped at a 2.5 percent pace last quarter, the biggest decrease since the third quarter of 2008.

Among manufacturers, productivity increased at a 6.3 percent pace, pushing labor costs down by 3.5 percent.

Compared with the first quarter of 2010, productivity climbed 1.3 percent, the smallest 12-month gain in two years. Labor costs rose 1.2 percent from the year-earlier quarter, the biggest year-to-year increase since the last three months of 2008.

The number of hours worked increased in the first three months of the year from the previous quarter even as the pace of economic growth slowed, showing employers found it difficult to meet demand without more hiring.

First Quarter

The economy expanded at a 1.8 percent annual pace from January through March, after a 3.1 percent advance in the last three months of 2010, the Commerce Department reported on April 28.

Signs of sustained demand are prompting companies to expand investment in capital equipment and take on more workers. Oak Brook, Illinois-based McDonald’s Corp. (MCD), the world’s largest restaurant chain by revenue, sought as many as 50,000 workers in the U.S. during its National Hiring Day event on April 19.

“We do and have continued to hire through some of the economic downturns, Donald Thompson, chief operating officer at McDonald’s, said on an April 21 conference call.

The Labor Department may report tomorrow that the U.S. added jobs in April for the seventh consecutive month, according to economist forecasts in a Bloomberg survey. The jobless rate probably held at 8.8 percent.

While today’s productivity report may show labor costs are rising, wage pressures are likely to remain contained. Federal Reserve policy makers after their April 26-27 meeting said “the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low” relative to their goal.

“The economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually,” according to the Fed statement last month.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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