Productivity Growth Strong; Labor Costs Up

U.S. business productivity (search) growth accelerated unexpectedly in the first quarter but labor costs picked up, according to a government report on Thursday that suggested a slight increase in profit and price pressures.

Nonfarm business productivity, or output per worker hour, rose at a 2.6 percent annual pace in the January-March period after gaining 2.1 percent in the fourth quarter, the Labor Department (search) said.

But unit labor costs, which economists eye closely to gauge inflation pressures, moved ahead at a 2.2 percent pace, an acceleration from an upwardly revised 1.7 percent fourth-quarter advance.

Wall Street economists had expected productivity growth to slow to a 1.9 percent pace, with unit labor costs accelerating to a 2 percent increase from the 1.3 percent gain initially reported for the fourth quarter.

A big first-quarter jump in worker hourly compensation, which rose at a 4.8 percent rate after a 3.8 percent fourth-quarter gain, lay behind the acceleration in unit labor costs, the report showed.

Productivity growth has slowed as the U.S. economic expansion has matured and businesses have found themselves less able to boost production without bringing on more workers. Productivity rose more than 4 percent in each of the last three years, but has slowed to a range more in keeping with historical experience.

Slowing productivity growth implies stepped up job creation, unless the pace of economic expansion cools, but also pressure on profits or prices — or both — as businesses find themselves facing increased labor costs.