U.S. productivity sees smallest annual gain since 2011

The productivity of American workers grew at a slower pace in the fourth quarter and last year recorded the smallest annual gain in five years.

The Labor Department said Wednesday that productivity grew at a 1.3 percent annual pace from October through December, down from 3.3 percent in the third quarter. For 2016, productivity eked out a 0.2 percent increase, the smallest since a 0.1 percent gain in 2011.

Labor costs, which account for changes in productivity, rose at a 1.7 percent annual pace in the fourth quarter. That's up from a 0.7 percent increase from July through September.

The fourth-quarter numbers were unchanged from an original report in February.

Gains in productivity have slowed in recent years for reasons economists are struggling to understand. Since 2007, productivity has grown by an average 1.2 percent a year, compared to an average 2.6 percent from 2000 through 2007 and 2.1 percent from 1947 through 2016.

Productivity measures output per hour worked. Increases are crucial for economic prosperity. When their workers are more productive, employers can afford to pay them more. And productivity gains, along with growth in the number of people working, determine how fast the economy grows.

The U.S. economy grew at a sluggish annual 1.9 pace from October through December, down sharply from 3.5 percent growth in the third quarter.

President Donald Trump vowed during the election campaign to double growth to 4 percent a year through tax cuts, deregulation and increased government spending on infrastructure and defense. Economists are skeptical he can reach that goal—or even the target of 3 percent or better offered by Treasury Secretary Steven Mnuchin—given the productivity slump.

Amid the decline, hiring is showing signs of picking up.

U.S. businesses added the most jobs in three years last month, a private survey found, a sign that hiring may be accelerating from last year's modest levels.

Payroll processor ADP said Wednesday that businesses added 298,000 jobs in February, up from 261,000 the previous month. The gains were led by a huge 66,000 increase in construction, the most in 11 years, and 32,000 manufacturing jobs, the most in five years.

The hiring boom in construction was likely driven by unseasonably warm weather in much of the country. Construction sites typically shut down in snow or freezing weather. Still, job gains were broad-based and suggest that increased business optimism may have led to more hiring. January and February's job gains are above last year's average of about 185,000 per month.