U.S. Productivity Fell 0.9% in First Quarter as Growth Cooled

The productivity of U.S. workers fell more than initially estimated in the first quarter as labor costs climbed, indicating companies may pause before bringing on new employees.

The measure of employee output per hour decreased at a 0.9 percent annual rate, after a 1.2 percent gain in the prior three months, revised figures from the Labor Department showed today in Washington. Expenses per worker rose at a 1.3 percent rate and output grew 2.4 percent, less than previously estimated.

The drop in productivity at the start of the year helps explain why payroll gains in May were the weakest in a year. Slower U.S. growth combined with European economies on the verge of recession shows why companies may cut back worker hours and become more deliberate in their hiring as they seek to protect profit margins.

“If demand remains weak, employers will push the existing workforce harder to boost productivity,” Brian Jones, a senior U.S. economist at Societe Generale in New York, said before the report. “We think you’re going to see slower growth, and the breadth of hiring, at least according to purchasing managers, is the weakest it’s been since last December.”

First-quarter productivity was projected to decrease 0.8 percent after a previously reported 0.5 percent decline, according to the median forecast of 59 economists surveyed by Bloomberg News. Estimates ranged from a decline of 1.1 percent to no change.

Unit labor costs, which are adjusted for productivity gains, were forecast to rise 2.1 percent in the January to March period, the survey median showed. Employment costs dropped 1.5 percent in the final three months of 2011, previously reported as a 2.7 percent increase.

Wages and Salaries

The fourth-quarter revision to labor expenses reflected updated figures on worker pay. Wages and salaries rose by $28.9 billion in the final three months of 2012, less than the $89.1 billion gain previously reported, the Commerce Department said May 31.

The gain in first-quarter output was the smallest in a year and followed a 3.7 percent gain in the fourth quarter, the revised figures showed.

Hours worked increased at a 3.3 percent pace from January through March, more than first estimated, after a 2.4 percent rise in the prior quarter. Compensation for each hour worked climbed at 0.4 percent annual pace.

Adjusted for inflation, compensation dropped at a 2 percent pace last quarter, following a 1.6 percent decrease in the previous three months.

Factory Productivity

Among manufacturers, productivity jumped at a 5.2 percent rate from January through March, the most since the third quarter of 2011.

Efforts to improve efficiency may come more slowly as companies reduce plans for capital investment. The U.S. economy grew at a 1.9 percent annual rate in the first quarter, less than the 2.2 percent initial estimate, after a 3 percent pace in the last three months of 2011. Spending on equipment and software added 0.3 percentage point to first-quarter growth, the smallest contribution since it subtracted from gross domestic product in the second quarter of 2009.

“I think we’re going to be really stingy on the kind of new incremental investments around growth initiatives until we can kind of verify the ones we’ve invested in work out well,” Ronald Sargent, chairman and chief executive officer at office- supply retailer Staples Inc. (SPLS), said on a May 31 conference call.

Corporate profits are at risk of eroding as productivity weakens. Earnings rose 0.6 percent last quarter, the smallest increase since a drop in the final three months of 2008.

With Europe on the threshold of recession and growth cooling in China, companies are limiting hiring. Payrolls climbed by 69,000 last month, less than the most-pessimistic forecast in a Bloomberg survey, after a revised 77,000 gain in April that was smaller than initially estimated. The jobless rate rose to 8.2 percent from 8.1 percent.

The Institute for Supply Management’s index of employment in the service industries, which make up about 90 percent of the economy, dropped to the lowest level in five months.

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

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

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U.S. Productivity Fell 0.9% in First Quarter as Growth Cooled

Jeff Kowalsky/Bloomberg

A worker in Michigan on April 17, 2012.

A worker in Michigan on April 17, 2012. Photographer: Jeff Kowalsky/Bloomberg