US first-quarter productivity rises at the fastest pace since 2014; labor costs fall

U.S. worker productivity increased at its fastest pace in more than four years in the first quarter, depressing labor costs and suggesting inflation could remain benign for a while.

The Labor Department said on Thursday nonfarm productivity, which measures hourly output per worker, increased at a 3.6% annualized rate in the last quarter. That was the strongest pace since the third quarter of 2014.

Data for the fourth quarter was revised down to show productivity rising at a pace of 1.3% instead of the previously reported 1.9% rate.

Economists polled by Reuters had forecast first-quarter productivity would advance at a 2.2% rate.

The acceleration in productivity was flagged by a surge in gross domestic product growth in the January-March period.

The economy grew at a 3.2% rate in the first three months of the year after expanding at a 2.2% pace in the fourth quarter.

The trend in productivity is improving. Compared to the first quarter of 2018, productivity increased at a rate of 2.4%, the best performance since the third quarter of 2010.

The strong pace of productivity suppressed growth in labor costs, a potential boost to corporate profits. Unit labor costs, the price of labor per single unit of output, fell at a 0.9% rate in the first quarter after increasing at a 2.5% rate in the prior quarter.

Compared to the first quarter of 2018, labor costs grew at a 0.1% rate, the weakest pace since the fourth quarter of 2013. Weak unit labor costs came on the heels of a report on Tuesday showing wages increasing steadily in the first quarter despite a tightening labor market.

The Federal Reserve on Wednesday held interest rates steady and signaled little desire to adjust them anytime soon. Fed Chairman Jerome Powell told reporters the moderation in price pressures was likely due to transient factors, and predicted inflation would rise back to the U.S. central bank’s 2% target. A key inflation measure tracked by the Fed increased 1.6% in the year to March, the smallest gain in 14 months.

In the first quarter, hourly compensation increased at a 2.6% rate, slowing from the fourth quarter’s brisk 3.9% pace. Hourly compensation increased at a 2.5% rate compared to the first quarter of 2018.