U.S. productivity grew solidly in the first quarter, although not as fast as in previous periods, and data also showed the number of U.S. workers filing claims for jobless aid fell slightly last week.
The Labor Department on Thursday said non-farm productivity rose at a 3.6 percent annual rate, the smallest advance in a year, after expanding at a brisk 6.3 percent pace in the fourth quarter.
Analysts had expected productivity, which measures the hourly output per worker, to rise at a 2.5 percent rate in the January-March period. The bigger-than-expected rise reflects the successful efforts by businesses to hold the line on hiring but the sharp slowdown indicates they won't be able to do so forever.
The productivity data is not as strong as the prior three quarters, but is strong by any other measure, and mainly reflects a slow shift toward hiring as firms lack the capacity to extract more output out of existing workers, said Alan Ruskin, chief currency strategist at RBS Global Banking and Markets in Stamford, Connecticut.
In a separate report, the Labor Department said initial claims for state unemployment benefits dropped 7,000 to a seasonally adjusted 444,000. Markets had expected claims to fall to 440,000.
U.S. stock index futures held losses, while government debt prices were steady at lower levels. The U.S. dollar held gains versus the euro.
The four-week moving average of new jobless claims, considered a better measure of underlying job market trends, fell 4,750 to 458,500, after rising for four weeks.
The labor market is on the mend after taking a beating during the recession, but the recovery pace may be painfully slow for the 8.2 million Americans who lost their jobs during the worst downturn since the 1930s.
Thursday's claims data has no bearing on April's employment report due on Friday, as it falls outside the survey period.
A Reuters survey predicted non-farm payrolls increased 200,000 last month following March's 162,000 gain. The employment rate is expected to have held steady at 9.7 percent for a fourth month.
Productivity expanded rapidly in the previous three quarters as businesses wrung more output from a small pool of labor. Despite the resumption of economic growth, firms have been reluctant to hire new workers, opting instead to increase working hours. With productivity slowing, they may need to start hiring workers to keep production up.
The economy grew at an annual pace of 3.2 percent in the first quarter slowing from a 5.6 percent inventory-induced spurt in the fourth quarter.
Total non-farm output grew at a 4.4 percent rate in the January-March period after a robust 7.0 percent pace in the fourth quarter, the Labor Department said. Hours worked edged up at a 0.8 percent rate, the highest since the second quarter of 2007, from 0.7 percent in the fourth quarter.
Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, fell 1.6 percent after dropping 5.6 percent in the fourth quarter.
While the first-quarter decline in unit labor costs was smaller than the previous quarter, it still pointed to muted inflation pressures and bodes well for the U.S. central bank's pledge to keep interest rates low for an extended period to aid the economic recovery. Analysts had expected unit labor costs to fall 0.7 percent in the first quarter
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)