Biggest U.S. Productivity Drop in Decades Sends Ugly OmenShobhana Chandra
Productivity over the past six months fell by the most in more than two decades, leading to increases in U.S. labor costs that threaten corporate profits.
The measure of employee output per hour decreased at a 1.9 percent annualized rate after a revised 2.1 percent drop in the prior three months, a Labor Department report showed Wednesday in Washington. The decline on average over the past two quarters was the biggest since the first six months of 1993. Expenses per worker increased more than projected at the start of the year.
A lack of business investment in new technology may mean productivity will continue to languish and limit the economic expansion’s potential. Rising labor costs without offsetting increases in efficiency would also hurt business earnings, and in turn restrain the hiring that would propel consumer spending.
“Dividends from the tech boom and tech investment are petering out,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, the top productivity forecaster over the past two years, according to data compiled by Bloomberg. “Rising wages aren’t a problem if you have rising productivity. When that isn’t happening and wages are moving higher, it comes out of firms’ pockets.”
Another report showed companies may already be thinking twice about adding additional staff. Employment in the private sector advanced by 169,000 in April, the weakest gain since January 2014, according to figures from the Roseland, New Jersey-based ADP Research Institute. The revised 175,000 increase in March was also smaller than previously projected.
Stocks fell, sending the Standard & Poor’s 500 Index to its lowest level in a month, as the weaker-than-forecast data added to concerns about slowing growth before Friday’s jobs report from the Labor Department. The S&P 500 declined 0.5 percent to 2,080.15 at the close in New York.
Unit labor costs, which are adjusted for efficiency gains, climbed at a 5 percent annualized rate in the first quarter, exceeding the projected 4.5 percent advance, according to the Bloomberg survey median. That followed a 4.2 percent increase in the last three months of 2014.
The first-quarter drop in productivity matched the median forecast in a Bloomberg survey of 57 economists. Estimates ranged from declines of 0.6 percent to 2.5 percent.
One reason for the decline in productivity was the series of issues, temporary and longer-lasting, that brought the economy to a near-halt in the first quarter: harsh weather, port-related delays, a stronger dollar and a drop in oil costs. These drags on growth had much less impact on employment, resulting in less output per employee.
That’s making economists such as Laura Rosner more optimistic about the outlook for productivity as growth is projected to rebound.
“The first quarter was a mix of several disruptions and shocks that hurt the economy,” said Rosner, a U.S. economist at BNP Paribas SA in New York. “Firms are still expecting final demand to be strong. As we get better growth, productivity will improve.”
Gross domestic product is projected to pick up after growing in the first quarter at a 0.2 percent annualized pace that was the weakest in a year. Individual forecasts based on data released since then show the U.S. may have contracted last quarter.
Year-over-year, efficiency increased 0.6 percent. That compares with an average 2.8 percent advance per year from 1995 through 2000, which was one of the strongest periods for productivity.
Slowing efficiency prevents economic growth from gaining momentum in the longer term. The pace at which an economy can expand without stoking inflation, which economists term its speed limit, reflects the rate of growth of the labor force plus how much each worker can produce. Weaker productivity therefore means advances in gross domestic product will also be restrained in coming years.
That’s among reasons why Federal Reserve policy makers, debating when to begin raising interest rates for the first time since 2006, have been watching trends in productivity.
As the labor market tightens and capacity utilization increases alongside improving demand, businesses may be encouraged to step up investment. That would eventually help reinvigorate productivity growth.
Employers probably added 230,000 workers to payrolls in April after a 126,000 gain in March that was the smallest in more than a year, according to the median forecast of economists surveyed by Bloomberg ahead of Friday’s report from the Labor Department.
Slowing productivity also may weigh on profits, which have been holding up so far this year. Of 395 companies in the Standard & Poor’s 500 Index that reported first-quarter results until Tuesday, 258 reported increased per-share earnings while 123 reported a decrease, according to data compiled by Bloomberg.
Concern over a profit squeeze is prompting hedge fund manager David Einhorn to scale back bets on stocks.
The shift “reflects our concerns about stretched valuations and challenges we see for corporate earnings,” Vinit Sethi, director of research at Einhorn’s DME Advisors, said Tuesday on a conference call discussing results at Cayman Islands-based Greenlight Capital Re Ltd., where Einhorn is chairman. “Another issue that has worried us, and is less discussed, is the productivity bust and its impact on peak margins.”