Productivity: Signs of Troughing Cycle

Bottom Line: The Bureau of Labor Statistics reported even lower than expected productivity for the 1st Quarter as output gained just 0.15%, but hours worked increased nearly 3% in the quarter. Unit labor costs continued to increase as hourly compensation rose and productivity fell. Unit labor costs have increased 5.8% in the last four quarters as wage growth remained historically robust but growth cooled. Labor productivity trends move at a glacial pace, jumping sharply after recessions as businesses do more with a smaller workforce. But then productivity fades sharply as businesses hire and wage pressures build. The economy is still in the late stages of the typical productivity trough, but we expect slower hours worked in the quarters ahead with still modestly positive growth. That should allow productivity growth to near its pre-pandemic trend rate of 1-1.5%.