Nonfarm Productivity Rose in the First Quarter

Nonfarm productivity rose at a stronger than expected 2.2 percent annual rate during the first quarter. The productivity gain was mostly due to another sharp cutback in hours worked. Output rose a scant 0.4 percent while hours worked fell 1.8 percent, the largest drop in five years.

Drop in Hours Worked Drives Productivity Gain

• Slower sales and higher expenses have caused firms to cut back on their employees' hours. This cutback was the primary driver for the stronger-than-expected productivity gain in Q1.
• The solid productivity number helped contain unit labor cost growth (ULC). ULC grew at a 2.2 percent pace in the first quarter while slowing to 0.2 percent on a year-ago basis.

Productivity Supports Economic Growth

• Productivity in the manufacturing sector rose at a 4.1 percent annual rate in Q1 and 4.1 percent over the past year.
• Solid productivity gains should help the economy avoid an outright recession by helping firms minimize the need for massive layoffs. So far we have yet to see outsized declines in nonfarm employment typical of an economy in recession.

Wachovia Corporation
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