Washington – The growth in worker productivity slowed in the first three months of this year but so did wages, providing evidence that a slowing economy is holding down inflation.
The Labor Department reported that productivity, the amount of output per hour of work, rose at an annual rate of 1.7 percent in the January-to-March quarter, down from a 2.1 percent rise in the final three months of last year.
Wages slowed even more sharply with unit labor costs rising at a 0.6 percent rate, compared with a 6.2 percent surge in the final three months of last year when year-end bonuses for high-income workers inflated the number.
The increase in productivity was slightly better than expected, while the slowdown in unit labor costs was much steeper than economists had anticipated.
Wall Street surged on the news, believing the lower wage pressures raised the chances the Federal Reserve might start cutting interest rates later this year.
The Dow Jones industrial average set a third straight record close, rising by 29.50 points to finish at 13,241.38 while the broader Standard & Poor’s 500 index had its first close above 1,500 since September 2000. Stocks have soared in recent weeks on strong first-quarter earnings reports from a number of companies. The rally got an extra push Thursday from the slowdown in unit labor costs.
“Passable productivity and benign labor costs hold out hope that firms can keep costs and inflation under control,” said Joel Naroff, chief economist at Naroff Economic Advisors.
In other economic news, the Institute for Supply Management reported the service sector, where 80 percent of Americans work, expanded at a faster rate in April than the previous month, with its index rising to 56 compared with a reading of 52.4 in March.
In a third report, the government said the number of Americans filing claims for unemployment benefits fell by 21,000 last week to 305,000, the lowest level since mid-January. It was a bigger-than-expected improvement and marked the third straight drop in weekly jobless claims.
While rising wages are good for workers, the Fed becomes worried if wage pressures outstrip productivity gains, a development that can send inflation higher. The Fed boosted interest rates for two straight years in an effort to slow economic growth enough to dampen rising inflation.
