Productivity dropped at a 3.1 percent annual rate instead of the previously reported 1.9 percent rate, the Labor Department said on Thursday. That was the first back-to-back fall in productivity since 2006.
The decline mirrors the economy’s dismal performance in the first quarter, when output shrunk at a 0.7 percent rate. Given that temporary factors contributed to the decline in output, the drop in productivity could be overstated and a rebound is likely in the second half of the year.
Still, weak productivity suggests that the economy’s potential growth could be lower than the 1.5 percent to 2.0 percent pace that economists are currently estimating.
Economists also say muted productivity growth, if sustained, raises the risk of a more rapid pick-up in inflation that would require more aggressive interest rate increases than the Federal Reserve and financial markets are currently anticipating.
Our economy is so fundamentally screwed up, that the Fed has been unable to prime the inflation pump even with trillions of dollars in stimulus and easing, all doused in the accelerant of zero interest rates.
Plenty of people have warned that the Fed may not be able to control the inflation genie, should they ever manage to unleash it.
I’ve been one of those people. I hope I’m wrong.