Ahead of the Bell: US productivity

US productivity likely tumbled in first quarter of 2015

Associated Press
US productivity falls at 2.2 percent rate in fourth quarter

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In this Sept. 19, 2014 photo, Adolfo Garzon cuts pieces for body armor at the Point Blank Body Armor factory in Pompano Beach, Fla. The Labor Department releases fourth-quarter productivity data on Thursday, March 5, 2015. (AP Photo/J Pat Carter)

WASHINGTON (AP) -- The Labor Department issues its revised report on productivity for the first quarter Wednesday at 8:30 a.m. Eastern.

PRODUCTIVITY SLIPS: The expectation is that productivity fell at an annual rate of 2 percent in the first quarter, according to economists surveyed by data firm FactSet. That would follow a 2.2 percent decline in productivity during the final three months of 2014. Economists also expect that employment costs rose 4.6 percent in the first quarter, compared to a 4.1 percent increase in the fourth quarter of last year.

BIG PICTURE: Falling productivity coupled with higher labor costs are usually a negative for the economy, pointing to slower growth ahead. Increased worker productivity generally fuels stronger economic performance. But the figures can be an extremely volatile on a quarterly basis.

Overall economic growth essentially flat-lined in the first quarter, rising at a tepid annual pace of only 0.2 percent, the government reported last week. The combination of harsh winter weather, falling oil prices hurting domestic energy firms and a West Coast ports dispute appears to have stifled the economy at the start of the year. Gross domestic product had risen at an annual rate of 2.2 percent in last year's October-December quarter.

Since the recession ended in mid-2009, labor costs had mostly been limited. But cost pressures have been rising as employers have added 3.1 million jobs in the past 12 months, causing the unemployment rate to plunge to 5.6 percent from 6.6 percent during the same period.

The rising employment costs likely reflect commissions and bonuses being paid to workers, said Ian Shepherdson, chief economist of Pantheon Macroeconomics, in a client note. Actual wages paid by companies — which don't include bonuses — have barely improved, as average hourly wages have risen just 2.1 percent in the past 12 months.

The Federal Reserve carefully monitors productivity and labor costs for signs that inflation is nearing higher levels.

At the moment, the Fed is looking for incomes to rise at a faster clip, which would help Americans catch up from a prolonged period when wage growth was weak.

For the past three years, inflation has been rising at rates well below the Fed's target of 2 percent annual price increases. In recent months, price gains have fallen further amid a big drop in oil prices and a stronger dollar that has made foreign-made goods cheaper for U.S. consumers.

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