Fed rate hike less likely to come anytime soon

US data discourages observers as worker productivity drops in first quarter of 2015, confirming sluggish performance

Photo by: Reuters
Photo by: Reuters

Updated Jul 28, 2015

US data on Thursday showed worker productivity weaker in the first quarter of 2015. With nonfarm productivity slumping greater than expected, a leap in labour related production costs were triggered. 

Recently, top Fed officials said the central bank is ready to raise interest rates as long as economic data picks up. However, data over the last few months has not been so encouraging. 

Productivity of nonfarm workers, measures of output produced for each hour of labour worked, fell at 3.1 percent annual rate, higher than the anticipated fall of 1.9 percent, reported the Labour Department. This was recorded as the first back-to-back fall in productivity since 2006.

The fall in productivity mirrors the economy's lethargic performance in the first quarter, when output contracted at a 0.7 percent rate. However, the fall is seen to be temporary and is expected to rise again in the second half of the year.

According to analysts, the stall in the productivity growth increases the risk of a faster pickup in inflation. In this case, an interest rate hike, greater than the one currently anticipated, is needed.

Productivity output fell at a 1.6 percent pace in the first quarter while hours worked rose at a rate of 1.6 percent.

Compensation costs per hour rose by a rate of 3.3 percent instead of the expected 3.1 percent pace.

Unit labour costs, rose at a 6.7 percent annual rate while analysts anticipated a 6 percent rise. Compared to the first quarter of 2014, unit labour costs rose at a 1.8 percent pace.This may mean a wage inflation is on its way. 

Janet Yellen, Federal Reserve Chairwoman said in a speech last month that productivity data since the recession has been “disappointing.”

“The most important factor determining living standards is productivity growth… over time, sustained increases in productivity are necessary to support rising incomes,” said Yellen.

The lethargic productivity could also mean that the economy’s potential growth could be lower than 1.5 percent to 2.0 percent pace analysts are currently expecting. 

According to another data released by the Labour Department, Inital claims for state unemployment benefits slumped by 8,000 to a seasonally adjusted 276,000 for the week ended on May 30. For 13 consecutive weeks claims have been below the 300,000 threshold, this generally means the labour market is picking up pace.

TRTWorld and agencies