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U.S. labor productivity fell in the first quarter of 2025—for the first time in nearly three years—as economic output declined, snapping a streak of efficiency gains that have helped temper the inflationary impact from employment costs.
Productivity, or non-farm employee output per hour, decreased at a 0.8 percent annualized rate after a revised 1.7 percent increase in the fourth quarter, data from the Bureau of Labor Statistics (BLS) showed this morning. Because of the decline in productivity, unit labor costs—what businesses pay employees to produce one unit of output—jumped 5.7 percent in the January-to-March period, the most in a year.
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The retreat in productivity was largely due to a 0.3 percent decline in business output, foreshadowed by data last week showing a trade-related slide in gross domestic product (GDP), even as worker hours climbed. Over the near term, productivity gains may suffer somewhat as companies reconsider investment plans until there’s more clarity about U.S. trade and tax policy. In addition to seeking fairness in bilateral commerce and shoring up national industrial security, the Trump administration is using tariffs to achieve its goal of stoking domestic manufacturing and investment.
Productivity gains—combined with a surge in immigration—have been largely seen as providing a boost to the economy and helping keeping a lid on inflation in the aftermath of the pandemic. Federal Reserve officials pay close attention to productivity data because gains in this area—including through technological enhancements like artificial intelligence—can help curb wage inflation. Labor costs are the biggest expense for many businesses, so firms often seek out new technologies and upgrade equipment to make their workers more efficient, helping blunt the inflationary impact of higher wages. Many companies are still making efforts to improve efficiency, though high borrowing costs, lingering inflation, and economic uncertainty have forced some to be selective about capital investments.
The BLS report showed hours worked rose 0.6 percent in the first quarter, while hourly compensation growth accelerated. Several other measures of pay gains have shown slower growth, supporting Fed Chair Jerome Powell’s assertion that the labor market is no longer a source of inflationary pressures. The government’s data showed productivity at manufacturers soared an annualized 4.5 percent in the first quarter, the most in nearly four years. Factory output jumped at a 5.1 percent rate, likely reflecting increased production of commercial aircraft.
Separate figures out today showed applications for U.S. unemployment benefits fell to 228,000 last week, underscoring that layoffs remain limited.
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