Source: Economics Group of Wells Fargo Bank, N.A.
Summary
Nonfarm labor productivity contracted at a 0.8% annualized rate in Q1. While eye-catching, productivity is noisy quarter-to-quarter, particularly given the trade-induced negative GDP growth print in Q1. When smoothing through recent choppiness, the underlying trend in labor productivity growth remains firm. Consequently, the underlying increase in unit labor costs is consistent with inflation eventually returning to the Federal Reserve’s 2% inflation target. That said, risk lies ahead. Slow growth in the labor supply could exert upward pressure on labor costs even as demand for workers eases, and tariffs pose some downside risk to productivity.
Productivity Slides into the Red
Nonfarm labor productivity hit an air pocket. Output per hour worked contracted at a 0.8% annualized rate in the first quarter, marking the first decline since 2022 (chart). The slip was driven by a mix of faltering output growth and stable employment growth in the first three months of the year. While eye-catching, productivity is noisy quarter-to-quarter, and this past quarter felt noisier than most. As discussed in our GDP write-up, tariff front-running led to a historic import surge that obscured still-solid domestic demand growth in the first quarter. Looking through the recent choppiness, labor productivity is up 1.4% relative to a year ago.