Productivity Growth Is Not Helping the Inflation Fight

Source: Economics Group of Wells Fargo Bank, N.A. Summary Weak productivity growth remains one of the many headwinds to the Fed’s efforts to corral inflation back to target. Nonfarm labor productivity declined at a 2.7% annualized rate in Q1 and 0.9% over the past year. Unit labor costs picked up to a 6.3% annualized pace over the quarter, checking some of the recent optimism that wage pressures are beginning to ease in a meaningful way. Doing Less with More Timing is everything, especially when it comes to short-term measures of productivity. A near stalling of production in Q1 coincided with a pickup in hours worked, leading to nonfarm labor productivity contracting at a 2.7% annualized rate in Q1. The decline in part reflects noise from the often lumpy path of both output and hiring over short intervals. Hours worked accelerated over the quarter amid the surge in Q1 hiring, while output growth slowed as businesses tapped into inventories to meet demand. However, the drop in Q1 labor productivity also reflects the typical cyclical hangover from demand recovering faster than employment, with the eventual catch up in hiring depressing output per hour worked. This dynamic was on full display in 2022, which matched the worst year for productivity growth (1974, with a drop of 1.7%) in records dating back to 1948. READ FULL ARTICLE >>