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. It finished the day up 6.47 at 1,502.39. 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. The Fed meets again next Wednesday and is expected to keep rates unchanged, believing it has done enough to slow the economy and cause inflation to retreat.
The government will report Friday on unemployment for the month of April. Analysts are looking for the jobless rate to edge up to 4.5 percent, after having dipped to 4.4 percent in March. They also expect payroll employment to increase by around 100,000, down sharply from the 180,000 jobs created in March as the job market begins to show the effects of a yearlong economic slowdown.
Overall economic growth, as measured by the gross domestic product, rose by just 1.3 percent in the January-to-March quarter, the slowest pace in four years as the economy was battered by a steep slump in housing.
The weak GDP growth in the first quarter translated into a slowdown in productivity growth as well. The 1.7 percent rate of increase was the slowest quarterly increase since productivity fell at a 0.5 percent rate in the third quarter last year. The 0.6 percent rate of increase for unit labor costs was the smallest gain since productivity costs fell by 2.5 percent in the second quarter of last year. For all of last year, unit labor costs rose by 3.1 percent, compared with a gain of 2 percent in 2005. Productivity for all of last year was up 1.6 percent, down from a 2.1 percent rise in 2005. For two decades beginning in 1973 productivity growth was weak, but in the mid-1990s there was a rebound as companies reaped the benefits of significant investments in computers and other high-technology products that made workers more efficient. The debate now is whether that surge in productivity was a one-time event or if productivity gains will continue in the years ahead. The outcome of that debate is crucial since rising productivity is the key ingredient needed for higher living standards.