U.S. Productivity Rises at 3.5% Annual Rate

U.S. worker productivity increased in the first quarter at a pace that’s likely to keep labor costs contained and the economy growing with low inflation, government figures released Tuesday show.

Nonfarm productivity rose at a 3.5% annualized rate in the first quarter, slower than the 4% pace the Labor Department previously estimated. It also was slower than the 4.3% rate posted for the fourth quarter of 1998. Still, the first-quarter figure exceeds the 2.2% increase for last year.

“Rising productivity growth is playing a key role” in restraining inflation, Richmond Federal Reserve Bank President Alfred Broaddus said in a speech to South Carolina bankers.

Increases in worker productivity and business efficiency are allowing the economy to expand and wages to rise without causing a greater rate of inflation.

Another report released Tuesday showed that wholesalers’ inventories rose 0.2% in March and April, which suggests that businesses are confident demand will keep rising. The inventory-to-sales ratio, which measures the time goods sit on storeroom shelves, was unchanged at 1.3 months, the Commerce Department reported. That figure is also an indication that excess stockpiles aren’t building.

The productivity report showed the labor cost index--which measures changes in worker compensation and productivity--rose at a 0.7% annualized rate in the first quarter. Although that is higher than the 0.3% increase previously estimated for the first quarter, it is still below last year’s 2% gain.Without adjusting for productivity gains, inflation-adjusted compensation per hour rose at a 2.6% annualized rate in the first quarter, the largest rise since a 3.7% pace in the first three months of last year. Compensation includes everything companies provide workers, from salaries to bonuses and health-care benefits.

That may be “the threat that hawks” on the Fed’s policy-setting Federal Open Market Committee “will undoubtedly seize upon,” said Joel Naroff of Naroff Economic Advisors Inc. in Holland, Pa.

Indeed on Tuesday, two Fed officials said a growing risk of accelerating inflation in the U.S. should raise concerns at the Fed.

Broaddus and St. Louis Fed Bank President William Poole suggested they would argue that the Federal Open Market Committee should raise the interest rates at its next meeting June 29-30. Neither is a voting member of the committee this year, but both participate in its deliberations.

“There isn’t a lot of evidence the economy has decelerated,” Broaddus said at a banking conference in Amelia Island, Fla. “The economy is in the midst of continuing, and probably above-trend, growth,” he said. At their last meeting, Fed policymakers said they were leaning toward raising interest rates.

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Business Productivity

Percentage change from previous quarter at annual rate, seasonally adjusted:

1st quarter: 3.5%

Source: Labor Department