U.S Labor Cost Rises and Productivity Falls in Opening Quarter; Private Sector Added 16900 Jobs at Slow Pace

The U.S is experiencing a stagnant opening quarter as the productivity rates fell by 1.9 % which is pushing up labor costs.

According to the ADP National Employment Report, the private sectors added around 170,000 jobs (approximately) in April which was significantly below the 200,000 mark, the economists believed that should have been achieved. What is a cause for concern is that the number of new jobs added was the lowest since January 2014.

The continuous cold weather coupled with the relatively strong dollar are the key drivers for behind the economy’s meager 0.2 % annual growth. Massive investment cuts by the energy companies and low oil prices all contributed in holding back the U.S economy in the first 3 months of 2015.

Other contributing factors in the slow growth were inadequate investments in new technology and port-related issues which had a direct impact on the economy.

The U.S experienced two quarters of back to back fall in productivity for the first time in over a decade. The productivity fell at a rate of 2.1 % in the final quarter of last year and it was followed up a 1.9 % decrease in this year.

Although the number of hours given by worker increased at a reasonable rate of 1.7 %, the labor cost spiked at a 5 % rate because of lower productivity. The problem with low productivity is not limited to higher labor costs in the short-term, according to economists. The problem has far more serious consequences as low productivity usually halts the economic growth to gain any significant momentum without fueling inflation. Thus if this issue of low productivity isn’t sorted in the coming months, the U.S could be facing sustainably lower GDP growth.

The Labor Department stated in a report published on Wednesday, that the nonfarm productivity dropped because of the extremely harsh winter that had a severe impact on output that caused production costs to soar at rates ever recorded in a single year.

Even though the hourly monetary remuneration increased around 3 % in the first quarter, the U.S needs to address the issue of low productivity coupled with rising labor costs, since these are the ingredients for another economic downturn, as investments continue to shrink due to lower corporate profits.