US productivity fell 1.7% during first quarter 2014

US productivity fell 1.7% (annualized) during Q1 2014 compared to the previous quarter, according to data published today by the Bureau of Labor Statistics, part of the US Department of Labor. While 2% more hours were worked output only rose by 0.3%, compared to Q4 2013.

Abnormally harsh winter conditions prevented some employees from either getting to work or doing their jobs properly. Snow and very cold temperature, which covered much of the country, depressed economic activity as shoppers stayed at home and companies postponed investment plans. The US economy slowed down significantly during the first quarter.

As economic activity picks up during the second quarter, productivity should rise again.

Year-on-year, productivity grew by 1.4% as output increased by 2.3% and hours worked by 1.7%.

The Bureau calculates labor productivity (output per hour) by dividing an index of real output by an index of total hours worked of all people, including proprietors, workers, and unpaid family workers.

Among non-farm businesses, unit labor costs rose 4.2% in Q1 2014, due to a fall in productivity plus a 2.4% increase in pay-per-hour. Over the last four quarter, labor costs grew by 0.9%.

In an interview with Bloomberg, Richard Moody, chief economist at Regions Financial Corporation in Birmingham, Alabama, said “All the things that held down GDP, including weather and slower foreign demand. You can get quarterly swings like this, but what’s more important is the underlying trend, and productivity growth has been slowing for a while.”

Economists follow a country’s productivity closely, because it can determine how rapidly an economy can expand without fueling inflation.

The manufacturing sector

In the manufacturing sector, productivity rose by 3.3% in Q1 2014 as output went up by 1.8% and total hours worked fell 1.4%.

In the durable goods and non-durable goods sectors productivity increased by 3.6% and 2.5% respectively.

Manufacturing productivity increased 2.2% over the last four quarters, while output rose 2.4% and total hours worked increased by 0.2%. Manufacturing unit labor costs fell by 0.2% compared to Q1 2014.

Non-financial corporate sector

Productivity in the non-financial corporate sector rose 2.1% in Q1 2014 compared to Q1 2013; there was no change over the last four quarters.

From 2012 to 2013, annual average productivity remained unchanged.

Productivity growth has slowed down since 2006

Bob McTeer wrote in Forbes today that the lower productivity data is the worst news yet about the US economy. Despite a new optimism in the air regarding the economy, he finds it hard to find much strong data to back up that optimism. “Having already weak productivity growth turn negative in the first quarter is possibly the worst news yet.”

Productivity increased almost 2.5% annually between 1990 and 2005. However, from 2006 to the end of 2013 it only grew by an average of approximately 1.5% each year. During the last three years the increase has averaged less than 1%.

The slowdown in productivity growth could be caused by one or several of the factors listed below:

  • Weak business investment in software and equipment.
  • Fewer new businesses being forms, possibly because people are more averse to risk or lack of financing.
  • Workers are not gaining the risk skills.
  • An aging workforce.