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Economic Report: U.S. productivity falls at fastest pace since 1947 and unit-labor costs soar

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The numbers: The productivity of American workers and businesses sank at an 7.5% annual pace in the first quarter — the biggest drop since 1947 — in a reflection of ongoing supply shortages.

The amount of goods and services produced, known as output, fell at a 2.4% rate in the first three months of the year, the government said Thursday.

Yet hours worked rose 5.5% annual rate, the government said Thursday.

Productivity is determined by the difference between output and hours worked.

Unit-labor costs surged at 11.6% annual pace in the first quarter. Over the past year these costs have risen at the fastest clip in 40 years

Unit-labor costs reflect how much a business pays an employee to produce one unit of output — say a ton of steel or a box of cookies.

Hourly compensation, or the amount of wages and benefits paid to employees, increased by 3.2%.

Yet adjusted for inflation compensation fell 5.5%, underscoring that rising prices are hurting breadwinners. Wages aren’t keeping up with inflation.

Big picture: The big drop in productivity is no surprise. High inflation has driven up the cost of business materials and ongoing supply shortages are limiting what companies can produce.

Workers, for their part, are demanding and receiving more pay amid the biggest labor shortage in decades. So it’s costing companies more to produce goods and services.

Yet if prices keep rising, something will to give, economists and business executives say. Profit margins could fall, customers could balk at higher prices and the economy could slow, especially with the Federal Reserve raising interest rates.

High productivity is a sign of a very healthy economy. Falling productivity is usually — but not always —a sign of trouble if it persists for extended periods.

Market reaction: The Dow Jones Industrial Average
DJIA,
+2.81%

X and S&P 500
SPX,
+2.99%

were set to decline in Thursday trades. Stocks rallied on Wednesday after the Federal Reserve indicated it would not raise interest rates quite as aggressively as investors had expected.

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