Productivity Won’t Offer A Painless Escape from Inflation


Nonfarm productivity plunged at a 7.5% annualized rate in Q1, the sharpest drop in 74 years. While the first quarter’s collapse paints an unduly weak picture of productivity, two years on from the onset of the pandemic, the trend in productivity growth appears little changed compared to before COVID. The Fed may be crossing its fingers for a boom in productivity as the painless way out of current inflation, but there are few signs of getting it. The trend in unit labor costs is running more than double the Fed’s inflation goal of 2%, signaling inflation pressures persist not only outside the U.S. with elevated commodity prices and still-knotted supply chains, but from within as the U.S. labor market remains exceptionally tight.

It’s Not Just Inflation That Is the Worst in Generations

If you feel like you have whiplash from following the productivity numbers since the pandemic, you’re not alone. Nonfarm productivity in Q1 plunged at a 7.5% annualized rate. To see a drop that steep, you’d have to look all the way back to 1947, when the economy was transitioning away from a different kind of crisis—World War II. That said, the first quarter’s collapse followed a 6.3% surge in Q4, as productivity growth continued the up and down pattern of the past two years (chart). READ FULL ARTICLE>>