Productivity and claims confirm the recovery is on

Summary

Nonfarm labor productivity rose at a 5.4% annualized clip in Q1, as demand roared back faster than businesses brought on workers. The surge follows the typical pattern of recovery but says little about the underlying trend in productivity. Meanwhile, jobless claims continued to catch up with other labor market data that have shown the jobs recovery picking up speed, dropping to 498K last week.

Productivity surges in typical recovery fashion

Labor productivity bounced back in Q1, rising 5.4% annualized, but continues to tell us little about how the pandemic may have altered the underlying trend in productivity. Business sector output strengthened to an 8.4% annualized pace in Q1, outpacing by far the 2.9% clip at which hours worked grew. That kept unit labor costs, a gauge of inflation pressure, little changed, down at a 0.3% annualized rate in Q1.

The surge in productivity as the recovery has gotten underway is a familiar pattern. Businesses are slow to add back workers until demand is clearly firming. Over the past year, labor productivity is up4.1%, which is not particularly extraordinary when compared to the past few recoveries. We expect to see productivity growth slow later this year as the jobs recovery progresses, especially in lower-productivity industries like leisure & hospitality. But whether the pandemic potentially boosted the lackluster pace of productivity growth that prevailed over the past decade, as companies have rapidly adopted new technology, will take more time to discern. If the underlying trend in productivity does pick up, that could keep wage pressures from becoming inflationary. 

Jobless claims join the club of clearly improving labor data

Elsewhere this morning, initial jobless claims broke below 500K, coming in at 498K. Jobless claims have fallen sharply since the start of April, bringing them more in line with other labor market data that show the jobs recovery picking up speed. We look for nonfarm payrolls to rise by 1.1 million in tomorrow's April employment report. The unemployment rate should continue to decline, but we expect it to edge down only slightly to 5.8% as the growing number of job opportunities, easing health concerns, and reopening of schools bring more workers back into the labor force. 

Download The Full Economic Indicators