US: Stronger productivity contributes to Fed’s inflation shortfall - Wells Fargo

The trend in productivity growth has improved over the past year, even if Q1’s 3.6% surge overstates the extent, explained analysts at Wells Fargo. 

Key Quotes: 

“Productivity leaped 3.6% in the first quarter as output strengthened and growth in hours worked slowed. That was the strongest quarterly gain since Q3-2014, and while overstating the trend, offers further evidence that productivity has picked up from the dismal performance earlier this cycle.”

“We expect productivity to moderate in the coming quarters but to remain stronger than earlier in the cycle at around 1%.”

“The pickup in productivity has provided businesses an outlet from rising compensation costs as the labor market has tightened. Unit labor costs (ULCs) declined nearly 1% in Q1. The overall trend in ULCs remains comfortably under 2% and suggests rising labor costs are not about to drive inflation up above the FOMC’s target.”