By James Pethokoukis

I only wish US productivity growth were as consistently strong as job growth. (The economy added 428,000 jobs in April, making it 12 consecutive months of employers adding at least 400,000 new jobs.) On Thursday, the Labor Department reported that non-farm business productivity fell at a 7.5 percent annualized pace, the sharpest quarterly decline in 75 years. “The mother of all productivity declines,” is how Capital Economics described it. 

Of course, productivity numbers are famously volatile, and that seems to be especially true during this pandemic era. Then again, it’s not the first lousy number. From a CE research note:

[Productivity] is now up only 2.6% since the fourth quarter of 2019, which translates into an annualized pace of little more than 1%. Pandemic-related shifts like working from home and increased capex provided no meaningful boost to labor productivity. 

And here’s JPMorgan’s take (bold by me):

Nonfarm productivity dropped 7.5% saar in 1Q on the combination of a 2.4% decline in output and a 5.5% increase in hours worked. Unit labor costs, meanwhile, surged 11.6% saar in 1Q. These 1Q figures were very close to our expectations, but the productivity reading disappointed the consensus and the unit labor costs figure beat the consensus forecast. The data can be choppy, and the 1Q swings likely are not fully indicative of the underlying trend. But as the recovery continues and the labor market keeps tightening, we think that the trend in productivity will moderate and the trend in unit labor costs will firm and these expectations have been broadly playing out through some of the noise in the quarterly readings.

Of course, I hope that we see rapid productivity growth, not just moderation in the current trend. This would be due to pandemic-related trends such as work-from-home and more e-commerce, but also greater diffusion of AI into the economy and perhaps a pro-productivity boost from the 2021 infrastructure bill.

And not all the news is bad. In March, the Labor Department reported that total factor productivity, or TFP, in the private nonfarm business sector increased 3.2 percent in 2021. That was the largest growth since 1983. (TFP is that part of economic growth that can’t be explained by production inputs, such as the number of hours worked or the amount of capital used. This unexplained bit presumably reflects advances in production technologies and processes.) The below chart comes from the San Francisco Fed, and includes a modified TFP measure that attempts to smooth out business cycle noisiness.

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