Productivity, Labor Costs Rise

First-quarter business productivity grew at a respectable pace, the government said on Thursday, but unit labor costs unexpectedly edged higher in a mild challenge to the Federal Reserve's (search) view inflation is no threat.

Non-farm business productivity, or worker output per hour, increased 3.5 percent in the January-to-March period from a revised 2.5 percent in the final three months of last year, the Labor Department (search) said.

Wall Street had forecast the 3.5 percent gain and the fourth quarter was previously reported as a 2.6 percent advance.

Productivity had been expected to moderate from its stellar performance in the third quarter of last year, when it rose 9.5 percent, because employment has picked up.

Economists speaking before the release thought the data would be consistent with trend potential GDP growth — the rate at which the U.S. economy can grow without hitting inflationary speed bumps — in the 3.5 percent to 4.0 percent range.

Unit labor costs (search) jarred slightly with this outlook, rising 0.5 percent over the first quarter, and the fourth-quarter measure was revised up to an unchanged reading from the originally reported 0.4 percent decline. Wall Street had expected no change in first quarter unit labor costs.

The first quarter's rise, combined with the upward revision, backed forecasts that the Fed will raise interest rates later this summer.

Powerful productivity growth has helped companies keep a lid on compensation costs but the pick-up in employment had been expected to signal the end of this cycle and the Fed will take note of the uptick in costs.

The central bank is expected to hike interest rate for the first time in four years in the months ahead, but announced after a regular meeting on Tuesday it would be "measured" in removing policy accommodation after leaving rates at a 1958-low of 1 percent.

Confirmation that unit labor costs, although turning higher, remain very low will endorse the Fed's view it can take its time in tightening policy to give the economy a decent chance to work off past excesses and take up the slack in the labor market.