Despite a slowdown in productivity and rising labor unit costs, the economy continues to show strength with initial jobless claims staying near recent lows and factory orders posting solid growth.
Initial jobless claims were unchanged last week at 208,000, according to the Bureau of Labor Statistics, remaining significantly lower than the pre-pandemic average of 218,000. With the labor market continuing to post strong job gains, the pressure on layoffs has been quite low in recent months. That is a recipe for sustainable labor market strength, keeping the economy on its solid growth trajectory this year.
Nonfarm productivity—measured as output per hour—slowed to 0.3% in the first quarter from a robust pace last year, according to data released Thursday by the Labor Department. While output was up by only 1.3%, hours worked increased by 1% as a result of impressive job gain numbers in the first quarter.
The productivity metric is, however, not a perfect measure for the adoption of technologies or new equipment, which is better reflected by total factor productivity. The Federal Reserve Bank of San Francisco will release that data later this month.
Of course, the Fed would face a problem if the downward trend in productivity continues because rising productivity was one of the key factors driving inflation down significantly last year. We don’t think there is enough evidence of that downtrend after only one data point. Instead, with the level of investment in artificial intelligence, automation, and businesses’ willingness to go out of their way to grasp those new technologies, we are more confident in the upside of the productivity boom than anything else.
Unit labor costs rose—a main driver of inflation, especially for core services—to an elevated 4.7% in the first quarter. While this will remain a problem for the Fed in the short run, we do think that the labor market will continue to cool, keeping the pressure off inflation. It may take longer to cool now given the influx of foreign-born workers, but that influx is also a supply-side boost which in fact helps with inflation.
March factory order data reaffirmed our call that business spending on capital goods will bring productivity up. Total orders rose 1.6%, the fastest since November. Excluding transportation and defense, orders remained strong at a 1.4% increase.
