U.S. productivity roared ahead at an 8.6% annual rate in the first quarter, with labour costs falling 5.4% in the period.

This is the fastest productivity increase in years, although in comes largely at the expense of workers. The dip in labour costs should help the U.S. Federal Reserve stand pat on interest rates until the recovery is convincing.

Much of the productivity gain came as output increased, while employment has remained more or less stable. In the period, compensation rose only 2.7%.

RBC Financial Group says that the huge productivity gain makes sense because the recent U.S. recession was short, shallow and narrowly based. “Output rebounded sooner than expected while firms have been downsizing aggressively since early last year. When demand recovered in the first quarter, firms simply turned up the machines, an easy feat given the large amount of excess capacity, and have been waiting to see if demand holds up long enough to begin re-hiring workers. So far, it seems as though firms are not yet confident enough in the outlook to begin hiring again.”

“Declining unit labour costs suggest little inflation pressure in the system. This implies little urgency for the Fed to raise interest rates. As well, it bodes well for very strong profit numbers for the first quarter that will be released with the revised Q1 GDP numbers May 24. This will be in contrast to recent reported earnings by various companies that reflect very sizeable writedowns,” says Bank of Montreal.

“There are lots of implications from this report, all of them are good: Profits are surging. The drop in unit costs will go straight to the bottom line. Inflation is absent. The drop in unit costs will allow some price-cutting. Cost cuts are happening quickly. So, they will come to an end sooner,” argues BMO Nesbitt Burns.

“A knock-on benefit to strengthening profit growth is that it will provide a boost to business investment, which has been one of the lagging sectors in the recovery to date. The apparent hike in productivity from earlier investment activity in the late 90’s provide further incentive for firms to undertake this expenditure,” concludes BMO.