U.S. worker productivity increased at an annualized rate of 1.6 percent in Q1, with unit labor costs rising three percent rate, the U.S. Labor Department announced Thursday, as companies continued to find ways to increase per employee output amid difficult business conditions. Economists surveyed by Bloomberg News had expected productivity to increase 1.2 percent in Q1 and unit labor costs to rise 2.8 percent. In Q4 2008, productivity increased at an 0.8 percent annual rate and unit labor costs rose 3.5 percent.
However, there is a downside to the recent, strong productivity data: hours worked plummeted nine percent in Q1 -- the largest drop in hours worked since 1975, the Labor Department said. The stat means companies are paring back staff roles and cutting hours -- which equates to fewer jobs -- while still maintaining production output.
A good year for productivity
And at this point, the trend has some legs. On a year-over-year basis, productivity rose 1.9 percent and unit labor costs have increased 2.2 percent, the Labor Department said. For all of 2008, productivity increased 2.8 percent, the largest productivity increase since 2003. In 2007, productivity increased 1.4 percent.
Still, that's also why, even with the record plunge in hours worked, Russell Price, a senior economist for Ameriprise Financial Advisors in Detroit, is emphasizing the silver lining in the U.S.'s latest "right-sizing"period.
"Companies are setting themselves up to see a nice expansion of profit margins once demand stabilizes and begins to grow," Price told Bloomberg News Thursday. "Higher productivity can offer a notable direct boost to the bottom line."
Economist: Strong economies increase productivity
Productivity measures output per hour worked. Economists say rising productivity usually leads to increases in income, as businesses can increase wages without increasing their per unit costs. While quarterly productivity statistics are important, most economists focus on the longer, multi-quarter trend, as it's more indicative of overall efficiency and output strength.
Productivity averaged an increase of about 2.7 percent during the 1948-1970 period, then slumped to 1.6 percent in 1971-1995 period. However, starting in 1995, the technology revolution driven by the PC, microprocessor, and the Internet propelled another large increase in productivity to increases of about 2.5 percent per year. The remarkable productivity rate helped create the record earnings and rising real median incomes that characterized the "Roaring '90s," says economist Peter Dawson.
Economic Analysis: Simply put, productivity continues to improve, and, while short-term that is a two-edged sword, long-term it can only be good for the U.S. economy and employees. The workforce is increasingly efficient, always a good sign, as it will keep per-unit production costs down going forward. As in 2007 and '08, companies did a good job of raising productivity while cutting labor costs. Given all the things that businesses can't control (sluggish sales, slack demand, tight credit), it's encouraging to see them getting better at controlling what they can -- and it will bode well for earnings growth as economic conditions start to brighten.