US productivity drops sharp 2.5% in Q1 as labor costs rise

WASHINGTON, May 9, (AP): U.S. productivity fell a sharp 2.5% in the first three months of this year, the biggest decline since 2015, with labor costs jumping 4.8%.

The Labor Department reported Thursday that the decline in productivity, the amount of output per hour of work, was the sharpest drop since a 2.9% decline in the final quarter of 2015. Productivity had risen 1.2% in the fourth quarter of last year.

The 4.8% increase in labor costs followed a tiny 0.9% gain in the fourth quarter and was the largest quarterly gain since a 5.7% rise in the first quarter of 2019.

The big jump in labor costs likely reveals how tumbling production and sales outpaced the speed at which companies could lay off workers. Unit labor costs would have spiked as that production slowed during the viral outbreak.

The drop in productivity reflected the biggest declines in output and hours worked since 2009 as the pandemic seized most of the country.

The government reported last week that the overall economy, as measured by the gross domestic product, fell at an annual rate of 4.8% in the first quarter, the biggest drop since the 2008 financial crisis.

Productivity gains, which have been weak over the past decade, had been improving slightly in recent years. That may be pushed back further still with the nation nearing recession.

“The unprecedented COVID-19 shock put an end to the slow revival in productivity growth that took hold over the past three years,” said Lydia Boussour, senior U.S. economist at Oxford Economics. “Going forward the trend in productivity growth will likely settle at a very subdued pace as firms remain reluctant to invest due to still-hesitant demand, financial pressure and lingering uncertainty.”

Meanwhile, U.S. consumer borrowing fell in March for the first time in more than eight years, with the category covering credit cards dropping by the largest amount in over three decades, the Federal Reserve reported Thursday.

The Fed’s report is the latest sign of how the coronavirus pandemic is disrupting the U.S. economy.

Consumer borrowing declined by $12 billion in March, the first time overall debt has fallen since August 2011, according to the central bank. The decline in percentage terms was 3.4%.

Borrowing in the category that covers credit cards dropped by $28.2 billion or 30.9%, the biggest percentage decline since January 1989.

Borrowing in the category that covers auto loans and student loans was up $16.1 billion or 6.2%.

Changes in consumer credit are closely watched for signals about how willing households are to take on more debt to finance their spending, which accounts for 70% of economic activity.

Economists believe that, given the millions of lost jobs and the steep drop in economic activity due to the efforts to contain the virus, there will be more weakness in consumer spending in coming months.

The overall economy shrank at an annual rate of 4.8% in the first quarter, the biggest decline in a decade as the pandemic shutdowns began in the middle of March. Consumer spending fell at a rate of 7.6% in the first quarter, the steepest decline since 1980.

Economists are forecasting an even worse outcome in the current quarter with the expectation that overall gross domestic product will drop by a record breaking 40%.

The $12 billion decline in consumer credit left the total at $4.21 trillion. The Fed’s monthly consumer credit does not include home mortgages or any other loans secured with real estate such as home equity loans.