U.S. workers raised their productivity in the opening quarter of this year. Their compensation went up briskly, too.
From a worker perspective more generous compensation — wages and benefits — is a good thing. But economists worry that big gains — if sustained for a long period — could cause inflation to take off.
The Labor Department reported Thursday that productivity — the amount an employee produces for every hour on the job — grew at an annual rate of 3.2 percent in the January-to-March quarter.
That marked a welcome turnaround from the closing quarter of 2005, when productivity actually declined at an annual rate of 0.3 percent, economists said.
Meanwhile, workers’ hourly compensation in the first quarter galloped ahead at a 5.7 percent pace — more than twice as fast as the 2.7 percent growth rate in the previous quarter.
“Labor costs have now become a warning flag for inflationary pressures,” said Joel Naroff, president of Naroff Economic Advisors. “They are rising fast enough to create real concerns that businesses will have to recoup some of those costs through higher prices.”
Because hourly compensation rose faster than productivity during the first quarter, employers’ unit labor costs went up at a 2.5 percent clip. Unit labor costs is a measure of how much companies pay workers for every unit of output they produce.
While that was down from a 3 percent pace in the fourth quarter, the still-buoyant growth made some economists uneasy about inflation.
The Federal Reserve and other economists look at labor costs for clues about inflation.
Federal Reserve Chairman Ben Bernanke and his colleagues want to make sure that inflation doesn’t threaten economic activity. Thus, policymakers are expected to boost rates by another quarter percentage point, to 5 percent, when they meet next Wednesday.
Some analysts believe that will be the last rate increase for a while in the Fed’s 2-year-old rate-raising campaign to thwart inflation. Others, however, think rates will rise to 5.50 percent before the Fed takes a break.
When adjusted for inflation, workers’ hourly compensation rose at a 3.6 percent pace in the first quarter, a more moderate showing than the unadjusted 5.7 percent growth rate. Yet, a vast improvement over the inflation-adjusted 0.6 percent decline in hourly compensation reported in the fourth quarter.
In other economic news:
— Shoppers seemingly undeterred by rising gasoline prices spent energetically in April, giving retailers strong sales for the month.
Wal-Mart Stores Inc., Costco Wholesale Corp., Nordstrom Inc., Abercrombie & Fitch Inc. and Limited Brands Inc. were among the merchants reporting better-than-expected results.
The sales results, along with other recent barometers, suggested the economy carried good momentum into the April-to-June quarter.
— New claims for unemployment benefits rose last week by 5,000 to 322,000, the Labor Department said in a separate report. Although jobless claims went up, the overall level still pointed to a good job-market climate.
Seasonal adjustment difficulties related to spring recesses may have distorted last week’s figure, a department analyst cautioned.
The increase left claims at their highest point since the middle of November. Analysts were expecting a slight dip. Still, the trend has been toward improvement. A year ago, claims stood at 341,000.
On the productivity front, efficiency gains are important to the economy’s long-term vitality. They allow the economy to grow faster without igniting inflation. Companies can pay workers more without raising prices, which would cut into those wage gains.
The showing on productivity in the first quarter was stronger than the 2.8 percent growth rate analysts were forecasting.
The pickup in productivity reflects a rebound in overall economic activity in the first three months of this year. The economy advanced at a brisk 4.8 percent pace in the January-to-March quarter, a considerable improvement over the feeble 1.7 percent pace logged in the final quarter of 2005. That weak showing in the fourth quarter was the main reason productivity flagged during that period.