U.S. productivity growth ticks down slightly in third quarter

U.S. productivity grew at an annual rate of 2.2 percent in the third quarter, a slowdown from the previous quarter but still better than the lackluster gains of the last decade. Labor costs accelerated but remained at a low level.

The rise in productivity in the July-September period followed a 3 percent rate of increase in the second quarter, which had been the strongest figure in three years. Labor costs rose at a 1.2 percent rate after having fallen at a 1 percent rate in the second quarter.

Productivity, the amount of output per hour of work, has been weak throughout the current recovery that began in June 2009. Analysts have been unable to come up with definitive reasons for the slowdown.

Productivity last year rose by just 1.1 percent. Over the past decade, productivity has been up at an average annual rate of 1.3 percent, just about half the 2.1 percent gains seen in the seven decades starting in 1947. The period from 2000 to 2007 saw even stronger annual gains of 2.7 percent, a burst that was credited to efficiency improvements achieved with the introduction of high-tech computers and other devices to the workplace.

A slowdown in the third quarter had been expected given that overall output, as measured by the gross domestic product, slowed to a still-strong annual rate of 3.5 percent in the April-June quarter after a sizzling 4.2 percent growth rate in the second quarter. With less output and hours worked rising at a rate of 1.8 percent, productivity edged lower.

Economists said they were not concerned about the slight acceleration in labor costs. The Federal Reserve closely watches various gauges of compensation to make sure that wages and salaries, the biggest component of business expenses, are not rising at such a rapid pace that the economy could be in danger of overheating.

"Any rise in core inflation from here will be very modest, allowing the Fed to continue with its policy of gradually normalizing interest rates," said Paul Ashworth, chief U.S. economist at Capital Economics.

Finding a solution to the slowdown in productivity growth is one of the key economic challenges facing the country. Rising productivity is critical to boosting standards of living because productivity gains allow companies to pay workers more without having to increase the cost of their products, which can be inflationary.

Economists are uncertain why productivity has remained static during a nine-year expansion. Some explanations include the difficulty of pulling out of the deep 2007-2009 recession and reluctance of companies to invest in new productivity-enhancing equipment.

Without a significant improvement in productivity, the Trump administration will find it difficult to achieve its goal of sustained GDP growth of 3 percent or better each year. An economy's potential for growth is determined by an expansion in the labor force, which is determined largely by birth rates and immigration, as well as the growth in productivity.

In a separate report, the Labor Department said that the number of Americans filing claims for unemployment benefits, a proxy for layoffs, dipped by 2,000 last week, to 214,000, further evidence of a healthy labor market. The government will release the October unemployment report on Friday and the expectation is that the jobless rate will remain at a 49-year low of 3.7 percent.