U.S. worker productivity increased in the first quarter of the year, bringing the one year gain to its highest level since 2010 and indicating that the economy may have picked up significantly as the year began.
Nonfarm productivity, which measures output per hour worked, soared in the January through March period to a 3.6 percent seasonally adjusted annualized rate. That was the strongest pace since the third quarter of 2014.
The productivity gain was particularly striking given the timing, as first quarters have frequently been weak in recent decades. This was the strongest first-quarter gain since 2005. First quarter productivity was higher in 2009 but that was largely because the workforce was contracting faster than output was falling.
The improvement was unexpected and the size was well above even the most optimistic forecasts. Economists had forecast first-quarter productivity would advance at a 1.9 percent rate, matching the initial report for the fourth quarter of 2019. The top of the range of estimates was for a 3.0 percent gain. The fourth quarter was revised down to show productivity rising at a pace of 1.3 percent from 1.9 percent.
Productivity has been a persistent weak spot for the U.S. economy since the Great Recession. It has exceeded 3 percent only twice since 2010. Many economists consider improved productivity the key to long-term economic growth.
The better-than-expected productivity growth explains the strong output numbers for the first quarter, when the economy grew at a 3.2 percent rate.
Productivity improvement may also explain why inflation has remained so low despite rising wages and a generally tight labor market. Workers who are paid more but are producing even more do not create pricing pressures for consumer goods. Unit labor costs, the price of labor to achieve a unit of output, fell at a 0.9 percent rate in the first quarter.
This may mean that businesses that cannot count on a loose labor market to easily supply new employees are investing in technologies and methods to get more out of the workforce they already have. It weakens economic arguments for the U.S. to increase visa allotments for foreign workers because it shows U.S. businesses have the ability to expand with workers already in the U.S. That is, productivity can substitute for immigration.
The fall in labor costs may also give stocks a boost as it improves corporate profitability.
In the first quarter, hourly compensation for all employees increased at a 2.6 percent rate. Salaries and wages for manufacturing employees were up 2.9 percent compared with the prior year.
Correction: An earlier version of this story misstated the previous year in which first-quarter productivity was as strong as the 2019 January through March period.