US productivity slump puts Fed in rate bind

Worker productivity dropped at a 1.9 percent seasonally adjusted annual rate in the three opening months of 2015, the Labor Department reported on Wednesday. This marks the second consecutive quarter of sluggish growth after nonfarm productivity fell at a revised 2.1 percent rate from October through December last year.

The negative trajectory marks the first back-to-back decline in productivity since 2006, and the biggest successive drop in over two decades.

Economists blamed part of the slump on blistering snowstorms, blanketing much of the Northeast and the Midwest earlier this year, which drove up unit labor costs by 5 percent - the fastest increase since this time last year.

Analysts say bad weather, a stronger dollar, spiralling oil prices triggering deep spending cuts by energy companies, and a protracted ports dispute on the West Coast, all coalesced to put a damper on the positive economic trend of the past years.

While gross domestic product (GDP) rose at an annual rate of 2.2 percent in the fourth quarter of 2014, it all but flat-lined, at 0.2 percent, in the first quarter this year, the government reported last week.

Despite the last six months' negative numbers, many economists are optimistic this is only a bump in the road for the US economy, which has seen the sharpest drop in unemployment since the 2008 recession.

"This is exactly what happened at this time last year, when the unseasonably bad winter hit output more than employment," said Paul Ashworth, chief US economist at Capital Economics.

"Productivity will rebound in the second quarter and unit labor costs will drop back."

All eyes on the Fed

However, Wednesday's report is likely to increase speculation that the Federal Reserve will hold off on hiking interest rates - something that just months ago had widely been expected to happen no later than June.

The Fed has kept its rates at near-record lows since 2006, in an effort to spur growth through easy access to cheap cash. But last year, Chairman Janet Yellen hinted at closing that chapter, which economists interpreted as a strong signal that the US had recovered from its worst recession in nearly a century.

Yellen said her decision would hinge on factors such as rising productivity, income and inflation. However, the latest numbers suggest that the world's biggest economy still has some catching up to do.

pad/uhe (AP, Reuters)