WASHINGTON (MarketWatch) -- Productivity in the U.S. economy remained at a healthy level in the first quarter and labor costs were contained, government data showed Wednesday.
Revised data showed productivity growth in the U.S. workplace increase at a slight faster pace during the first quarter -- a 2.6% annual growth rate, up from the 2.3% estimated a month ago -- as output accelerated in line with the recent upward revision to growth in the nation's gross domestic product during the first three months of the year.
Productivity in the nonfarm business sector is up 3.3% over the past four quarters, marking the fastest pace since the final three months of 2004.
Meanwhile, first-quarter unit labor costs -- a key gauge of inflationary pressures spawned by labor markets -- were revised lower, down to a 2.2% annualized rate from 2.3% earlier.
Unit labor costs are up 0.7% in the past year, the slowest pace since the fourth quarter of 2004.
The Labor Department's revisions were close to expectations of Wall Street economists. See Economic Calendar.
Doves on the Federal Reserve have pointed to low labor costs as one bright spot among a backdrop marked by higher prices for gasoline and food.
But hawks among the central bank's policymakers have recently argued that labor costs are a lagging indicator and may begin to rise sharply in coming quarters.
Productivity increased 1.8%, unrevised, in the fourth quarter, while unit labor costs were revised up to 4.7%, reflecting prior government upward revisions to compensation.
Fewer hours worked
In the first quarter, output rose 0.7% at an annualized pace, while hours worked slipped 1.8% and inflation-adjusted, or real, hourly compensation rose by 0.6%. Read the full report.
The drop in hours worked was the key factor keeping productivity healthy despite the slowdown in the economy since last fall, economists said.
"While the pace of activity has cooled noticeably, the labor market deterioration has been even more dramatic, so that the productivity figures have not shown any cyclical slowdown," said Michelle Girard, strategist at RBS Greenwich Capital.
Productivity in the nonfinancial sector increased even more, growing by 4.6% in the first quarter and by 3.0% over the past four quarters.
Nonfinancial productivity is considered by policymakers to be the cleanest "read" on productivity, because productivity in financial services appears impossible to measure.
Also in the nonfinancial sector, unit labor costs rose by 1.2% for the first quarter and by 1.1% over the past four quarters. Real hourly compensation is up 1.5% in the first quarter but flat over the past year.
Output in nonfinancial sector was up 3.2%, while hours worked fell 1.4%.
Key to higher living standards
Productivity, a concept that's simple in theory but elusive in practice, represents output divided by hours worked. Productivity gains are central to the achievement of better living standards, higher wages, increased profits and low inflation.
High productivity growth means the economy can grow rapidly without incurring inflation, thus raising living standards and theoretically allowing workers to get big raises without hurting the boss's profits.
But a low rate of productivity growth can mean a sluggish economy and increased inflationary pressures.
Unfortunately for those who want easy answers, in practice productivity is extremely difficult to measure, particularly in the services.
Most economists focus on the longer trend, rather than on the volatile quarterly numbers.
In the manufacturing sector, productivity increased 3.6% in the first quarter. Unit labor costs jumped 4.2%.
In a separate economic report Thursday, the Institute for Supply Management said its services index stayed above 50% for the second straight month in May. See full story.
In addition, a sampling of Automated Data Processing Inc. data indicated that payrolls in the U.S. private sector expanded by 40,000 in May -- potentially a good sign going into Friday's employment report from the Labor Department. See full story. 
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