Productivity Rose 3.6% in Q1, Labor Department Says

But unusually low labor costs are unlikely to continue

The Labor Department said Thursday, May 6, that productivity grew at an annual rate of 3.6 % in the first quarter, as labor costs dropped more than expected. That was better than the 2.6% increase economists had forecast.

Unit labor costs fell at a 1.6% rate, which was better than the consensus 0.7% decline.

The economy has been growing since the summer but companies have been reluctant to hire back workers. They are opting to push their smaller work forces to produce more, which has translated into a surge in productivity.

In an analyst note by Ian Shepherdson, chief U.S. economist at High Frequency Economics, the 20-year average for productivity is 2.4%, so the average gain of 7.2% during the surge of the past three quarters was unsustainable.

For all of 2009, productivity, the amount of output per hour of work, rose at a 3.7% rate, nearly double the 2% increase in 2008. It was the fastest annual increase in productivity in seven years.

Shepherdson, writing about that jump in productivity, stated, "Companies addressed the post-Lehman collapse in the economy with a massive wave of layoffs; with demand now picking up, albeit modestly, they need to hire again. The good news for businesses is that unit labor costs are still falling and will likely do so all year, just. That means no inflation threat from the labor market--deflation is the bigger risk--and no give-back of the recent margin expansion."

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