US DATA: A Sharp Increase In ULCs But Trend Far More Subdued

Preliminary Q1 productivity and unit labor cost (ULC) data fired a warning shot with a sharp increase in ULCs, although it’s just one quarter of data and with more encouraging longer-term trends. It’s unlikely to alter Powell’s view that “the labor market is not a source of significant inflationary pressures”. 

• ULCs increased 5.7% annualized in Q1 (cons 5.1) after a marginally downward revised 2.0% (initial 2.2%) in Q4, with the actual level of ULCs in Q4 only revised down a non-annualized -0.06%.
• ULC data are volatile from quarter-to-quarter, with this acceleration following an average -1.2% in 2Q/3Q24 which in turn followed a huge 8.3% back in 1Q24.
• Productivity meanwhile was as expected at -0.8% annualized after a marginally upward revised 1.7% (initial 1.5%). Similarly, the actual level in Q4 was only revised up 0.06% non-annualized.
• It’s a rare weak patch for productivity growth amidst tariff front-running that has distorted national accounts in Q1, but it follows some robust growth over the past two years.
• Y/Y rates give a better sense of trends, with productivity growth of 1.4% Y/Y (down from the 2.7% averaged in 2024) helping limit ULC growth to 1.3% Y/Y (down from 2.3% in 2024).
• As Fed Chair Powell once again repeated at yesterday’s FOMC press conference, “a wide set of indicators suggests that conditions in the labor market are broadly in balance and consistent with maximum employment. The labor market is not a source of significant inflationary pressures.”