U.S. worker productivity recorded the largest annual second quarter drop since 1948, according to the Labor Department.
Data from the department show wages and benefits increased by 11% annually while hourly output per worker fell by 2.5% from a year ago.
The productivity decline came from the services sector. It reflects an imbalance in the workplace, where employees are costing more to produce fewer goods and services than in the previous year, despite a 2.6% increase in hours worked.
The rising labor costs compel businesses to offload their expenses onto the end consumer. As consumer products become more expensive, workers demand more pay to cover the increasing costs.
This back-and-forth creates a wage-price spiral that can keep inflationary pressures elevated.
At an annualized rate, nonfarm productivity declined 4.6% in the second quarter. Economist expectations were that productivity would decline by 4.7% between April and June, according to a Reuters poll.
As worker compensation goes up to match the cost of inflation, it becomes more difficult for businesses to measure underlying productivity, which is about 1% or less, according to some economists.
With such a sharp decline in U.S. productivity in July, economists look to the Federal Reserve’s next FOMC meeting in September for a clearer picture of what steps chairman Powell will take to curtail spending and allow prices to cool down.