06/04/2015

U.S. nonfarm productivity fell more sharply than initially thought in the first quarter, leading to a jump in labor-related production costs, a trend that could ignite inflation if sustained.

Other data on Thursday showed the labor market tightening, with first-time applications for unemployment aid falling slightly more than expected last week and the number of people on benefit rolls hitting the lowest level since 2000.

The data likely keep the Federal Reserve on track to raise interest rates later this year.

Productivity fell at a 3.1 percent annual rate instead of the previously reported 1.9 percent pace, the Labor Department said. That was the first back-to-back fall in productivity since 2006.

U.S. stock index futures and the dollar trimmed losses after the data. Prices for U.S. Treasuries were slightly higher.

The productivity decline mirrors the economy's dismal performance in the first quarter, when output contracted at a 0.7 percent rate.

Given that temporary factors contributed to the decline in output, the drop in productivity could be overstated and a rebound is likely in the second half of the year.

Still, weak productivity suggests that the economy's potential growth could be lower than the 1.5 percent to 2.0 percent pace economists currently estimate.

Economists also say muted productivity growth, if sustained, raises the risk of a faster pick-up in inflation that would require more aggressive interest rate increases than the Federal Reserve and financial markets currently anticipate.

Productivity rose only 0.3 percent from a year ago. Workers put in slightly fewer hours in the first quarter than previously estimated. Hours increased at a 1.6 percent rate instead of the previously reported 1.7 percent pace.

With output declining at a 1.6 percent pace, unit labor costs increased at an upwardly revised 6.7 percent rate in the first quarter, the fastest pace since the first quarter of 2014.

Unit labor costs, the price of labor per single unit of output, were previously reported to have increased at a 5.0 percent rate. Unit labor costs rose at a 1.8 percent pace compared to the first quarter of 2014, a sign that wage inflation is benign for now.

Compensation per hour increased at a 3.3 percent rate in the first quarter of 2015, instead of the previously reported 3.1 percent pace. Wage growth looks set to pick up as the labor market tightens.

In another report, the Labor Department said Initial claims for state unemployment benefits dropped 8,000 to a seasonally adjusted 276,000 for the week ended May 30. It was the 13th straight week that claims held below the 300,000 threshold, which is usually associated with a strengthening labor market.

Economists had forecast claims falling last week to 279,000.

The tightening jobs market underscores the economy's solid fundamentals even though growth is struggling to regain steam after output contracted in the first quarter.

The economy got off to slow start in the second quarter in part because a strong dollar and spending cuts in the energy sector constrained manufacturing activity.

There are, however, signs of some pick-up, with data this week showing a surge in automobile sales in May and gains in factory activity last month for the first time since November. In addition, the trade deficit narrowed sharply in April and construction spending hit its highest level since November 2008.

Last week's claims report has no bearing on May's employment report, which is due for release on Friday, as it falls outside the survey period.

Still, the claims data suggest another month of solid job growth. According to a Reuters survey of economists, nonfarm payrolls likely increased 225,000 last month after rising 223,000 in April.

Thursday's claims report showed the number of people still receiving benefits after an initial week of aid fell to its lowest level since November 2000.\

By Lucia Mutikani - Reuters (Editing by Paul Simao)