US labour market still tight; productivity falters in Q1

The number of Americans filing new claims for unemployment benefits held steady at a low level last week, pointing to a still fairly tight labour market that should continue to underpin the economy in the second quarter.
Economists largely shrugged off other data from the Labor Department on Thursday showing growth in worker productivity almost stalled in the first quarter, noting that the trend in productivity remained solid. They also argued that there was a seasonal quirk, which tended to bias gross domestic product and productivity lower in the first quarter.
At face value, the sharp slowdown in productivity and accompanying surge in labour costs would raise concerns about inflation pressures building up as well as profit margins being squeezed, which would impact demand for labour.
“We believe such fears are misplaced,” said Conrad DeQuadros, senior economic advisor at Brean Capital. “We have identified residual seasonal adjustment bias in the quarterly GDP growth measures that depress first-quarter growth, and since productivity is measured by the sector’s GDP divided by hours worked, this bias also depresses productivity.”
Initial claims for state unemployment benefits were unchanged at a seasonally adjusted 208,000 for the week ended April 27. Economists polled by Reuters had forecast 212,000 claims in the latest week. Claims have been bouncing around in a 194,000-225,000 range this year.
Though demand for labour is softening, with job openings falling to a three-year low in March, layoffs remain very low as companies hang on to their workers following challenges finding labour during and after the Covid-19 pandemic.
The Federal Reserve on Wednesday kept the US central bank’s benchmark overnight interest rate unchanged in the current 5.25%-5.50% range, where it has been since July. Fed Chair Jerome Powell told reporters on Wednesday that progress lowering inflation had stalled. Powell described the labour market as having remained “relatively tight,” but also noted that “supply and demand conditions have come into better balance.” He pushed back against chatter of stagflation and the central bank needing to raise rates again.
Since March 2022, the Fed has hiked its policy rate by 525 basis points. Labour costs and inflation jumped in the first quarter.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, was also unchanged at a seasonally adjusted 1.774mn during the week ending April 20, the claims report showed.
The claims data have no bearing on April’s employment report, which is scheduled to be published on Friday. Nonfarm payrolls likely increased by 243,000 jobs in April after a gain of 303,000 in March, according to a Reuters survey of economists. The unemployment rate is forecast unchanged at 3.8%.
In a separate report on Thursday, the Labor Department’s Bureau of Labor Statistic said nonfarm productivity, which measures hourly output per worker, increased at a 0.3% annualised rate in the first quarter after rising at a 3.5% pace in the October-December period.
The government on Friday corrected productivity data from 2019 through 2023 due to a computation error.
Economists had forecast productivity would increase at a 0.8% rate. Productivity advanced at a 2.9% pace from a year ago. Economists are keeping an eye on productivity to gauge how quickly labour costs can rise without re-igniting inflation.
Unit labour costs — the price of labour per single unit of output — jumped to a 4.7% rate in the January-March quarter after being unchanged in the prior quarter. Labour costs increased at a 1.8% pace from a year ago.
Compensation shot up at a 5.0% rate last quarter after rising at a 3.5% pace in the October-December quarter. It increased at a 4.7% rate from a year ago.