U.S. productivity fell for the first time in six years during the first quarter of 2001, confirming the slowing scenario for the economy and shoring up hopes for further cuts to interest rates.

Non-farm productivity in the United States unexpectedly fell 0.1% during the first quarter. Economists anticipated a 0.8% gain. On an annual basis, productivity is up 2.8%, down sharply from the 4.3% increase in 2000. The manufacturing sector saw declines in output and hours worked, but manufacturing productivity rose by 0.3%.

With productivity sliding, unit labour costs rose 5.2%, higher than economists’ consensus estimates. This was also the largest rise since 1997, and much faster than the 3.2% rise in core inflation during the quarter.

BMO Nesbitt Burns says, “That wages are rising in the face of falling productivity is not a great surprise and has been seen during previous periods of economic slowdown. Going forward, wage gains are likely to moderate as firms find profit margins are being squeezed and labour markets are softening. The inflationary impact of the rise in unit labour costs will be temporary.”

If inflation is not a worry, the slide in productivity is. Although some market observers consider it a backward-looking indicator of the drought in capital spending. A drought that some think is starting to ease.

The bottom line for BMO Nesbitt is that, “The decline in productivity reinforces the view that the U.S. economy is in the midst of a sharp slowdown, that wage gains will be limited going forward, and that profit margins will remain under pressure until an economic recovery is well entrenched. There is nothing in this report that should dissuade the Fed from cutting rates by 50 bps on May 15.”