WASHINGTON -U.S. worker productivity dropped in the first quarter for the first time in nearly three years, resulting in a surge in labor costs that could squeeze margins for businesses at a time when they are facing rising costs from tariffs.
Nonfarm productivity, which measures hourly output per worker, fell at a 0.8% annualized rate last quarter, the Labor Department’s Bureau of Labor Statistics said on Thursday. That was the first decline since the second quarter of 2022 and followed an upwardly revised 1.7% growth pace in the October-December quarter.
Economists polled by Reuters had forecast productivity declining at a 0.7% pace following a previously reported 1.5% growth rate. Productivity grew at a 1.4% rate from a year ago.
The drop in productivity was flagged by the government’s advanced gross domestic product report for the first quarter published last week, which showed the economy contracting at a 0.3% annualized rate, the first decline in three years.
The economy was swamped by a flood of imports as businesses rushed to bring in goods before President Donald Trump’s tariffs kicked in. The sweeping tariffs, including 145% duties on Chinese imports, are seen raising costs for businesses.
Unit labor costs – the price of labor per single unit of output – jumped at a 5.7% rate in the first quarter after rising at a downwardly revised 2.0% rate in the October-December. Economists had forecast labor costs accelerating at a 5.1% rate after advancing at a previously reported 2.2% pace.
Labor costs increased at a 1.3% rate from a year ago.
Hourly compensation shot up at a 4.8% rate after advancing at 3.7% pace in the prior quarter. It grew at a 2.7% rate from a year ago. The labor market is slowing and is not regarded by policymakers as a significant source of inflation.
The Federal Reserve on Wednesday kept it benchmark overnight interest rate in the 4.25%-4.50% range, but said it “judges that the risks of higher unemployment and higher inflation have risen.” The U.S. central bank has a 2% inflation target.
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