U.S. productivity rebounds in fourth quarter; labor costs growth slows

[February 06, 2020]WASHINGTON,  (Reuters) - U.S. worker productivity rebounded in the fourth quarter, keeping labor costs in check.

The Labor Department said on Thursday nonfarm productivity, which measures hourly output per worker, increased at a 1.4% annualized rate last quarter. Productivity decreased at an unrevised 0.2% pace in the July-September period, the biggest drop since the fourth quarter of 2015.

Economists polled by Reuters had forecast productivity rebounding at a 1.6% rate in the fourth quarter.

Compared to the fourth quarter of 2018, productivity increased at a 1.8% rate. It accelerated 1.7% in 2019, the strongest since 2010, after increasing 1.3% in 2018.

Sluggish productivity is one the reasons the economy has struggled achieve the Trump administration's target of 3% annual growth. The economy grew 2.3% in 2019, the slowest in three years, after logging 2.9% in 2018.

Productivity increased at an average annual rate of 1.3% from 2007 to 2019, below its long-term rate of 2.1% from 1947 to 2019, indicating that the speed at which the economy can grow over a long period without igniting inflation has slowed.

Economist estimate the economy's growth potential at around 1.8%. Some economists blame tepid productivity on a shortage of workers as well as the impact of rampant drug addiction in some parts of the country.

Work crews construct a new hotel complex on oceanfront property in Encinitas, California, U.S., November 26, 2019. REUTERS/Mike Blake

Others also argue that low capital expenditure, which they say has resulted in a sharp drop in the capital-to-labor ratio, is holding down productivity. There is also a belief that productivity is being inaccurately measured, especially on the information technology side.

Hours worked rose at a 1.1% rate in the fourth quarter. That was down from the 2.5% pace notched in the third quarter, when hours were boosted by a surge in the volatile self-employed and unpaid family workers component.

With productivity rebounding last quarter, growth in unit labor costs - the price of labor per single unit of output - slowed to a 1.4% rate. Unit labor costs increased at a 2.5% rate in the July-September period.

Compared to the fourth quarter of 2018, labor costs grew at a 2.4% rate. They increased 2.0% in 2019 after rising 1.8% in 2018, suggesting inflation will probably continue to run below the Federal Reserve's 2% target even as the labor market has tightened.

Hourly compensation increased at a 2.8% rate in the fourth quarter. That followed a 2.3% pace in the prior quarter.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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