U.S. non-farm productivity fell at its fastest pace in a year in the first quarter as harsh winter weather restrained output, leading to a jump in labor-related production costs.
The drop in productivity, which mirrored a sharp decline in economic growth, is temporary and Federal Reserve officials are likely to shrug off the spike in labor costs, analysts said.
"Weather impacts are temporary, and as such, we should see productivity growth rebound substantially in the second quarter as economic growth strengthens," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
Productivity declined at a 1.7 percent annual rate, the biggest drop since the first quarter of 2013, the Labor Department said on Wednesday.
Productivity, which measures hourly output per worker, advanced at a 2.3 percent pace in the fourth quarter and economists had expected it to fall at a rate of only 1.0 percent in the first three months of the year.
An unusually cold and snowy winter in large areas of the United States slammed output, which rose at a feeble 0.3 percent rate, braking sharply from the fourth-quarter's brisk 3.8 percent pace.
The decline in productivity was in tandem with an abrupt slowdown in economic growth in the first quarter.
Gross domestic product expanded at a 0.1 percent annual rate, the government said in its advance estimate last week, a slowdown from the fourth quarter's 2.6 percent rate.
However, subsequent data on March trade, factory orders and construction spending suggest the economy actually contracted in the first three months of the year.
Productivity Trend Steady
The trend in productivity, however, remains modestly up. Compared to the first quarter of 2013, productivity increased 1.4 percent. Workers put in more hours in the first quarter but with output falling that raised labor costs.
Unit labor costs, the price of labor per single unit of output, surged at a 4.2 percent rate after falling at a 0.4 percent rate in the fourth quarter. It was the biggest rise in unit labor costs since the fourth quarter of 2012.
Economists had expected unit labor costs to increase at a 2.6 percent rate. Despite the rise last quarter, there was little sign that wage inflation was igniting.
Unit labor costs rose only 0.9 percent compared to the first quarter of 2013.
"I am not seeing any firming trend in wages at this point," said Alan MacEachin, an economist at Navy Federal Credit Union in Vienna, Virginia. "I don't think we are going to see a firming in wages at least for a year. The market thinks the Fed will start to tighten [policy] mid to late 2015."
A government report last week showed labor costs increased at their slowest pace in more than two years in the first quarter. In addition, the closely watched employment report released last week showed wage growth was stagnant in March.
Slack in the jobs market is suppressing wage inflation, keeping overall price pressures in the economy benign.
Though temporary, the drop in productivity and weak economic growth bode ill for hiring. Employers added 569,000 jobs in the first quarter.
Daniel Silver, an economist at JPMorgan in New York, said the combination of solid labor demand and weak GDP growth in first quarter probably will not be sustained.