U.S. productivity shows modest fourth quarter increase

U.S. productivity grew at a rate of 1.9 percent in the fourth quarter, a slight improvement over the third quarter. Labor costs rose 2 percent, the strongest gain since the beginning of 2018.

The Labor Department reported Thursday that the result from the October-December period was slightly better than a 1.8 percent rise in the third quarter. For the full year, productivity rose 1.3 percent, a small improvement from a 1.1 percent gain in 2017. It was the best showing since a 3.4 percent productivity surge in 2010.

Productivity is the amount of output per hour of work. The strong showing in 2010 had followed a 3.5 percent surge in 2009. Those two strong years were the exceptions in the current nearly 10-year long recovery. Productivity overall has been extremely weak, and economists consider boosting productivity growth as the key challenge facing the U.S. economy.

Since 2007, productivity growth has averaged just 1.3 percent a year, less than half the 2.7 percent gain during the period from 2000 to 2007 and also below the average since 1947 of 2.1 percent annual gains.

Economists attribute the solid gains before the deep 2007-2009 recession to the increasing use of technology in the workplace. But they have been stumped in trying to explain why productivity has slowed so much since the recession.

Without a significant improvement in productivity, analysts say that the Trump administration will not be able to achieve its goal of pushing overall economic growth to sustained annual gains of 3 percent in the gross domestic product. GDP growth is determined by two major factors: growth in the labor force and growth in productivity.

The 2 percent rate of increase in labor costs in the fourth quarter followed a 1.6 percent third quarter gain. Labor costs rose 1.4 percent for the year, lower than the 2.2 percent increase in 2017.

The government reported last week that GDP grew at a 2.6 percent rate in the fourth quarter, a slowdown from the previous two quarters. For the year, GDP grew 2.9 percent, the best showing since 2015. However, analysts are forecasting growth to decelerate to just above 2 percent as the boost from the 2017 tax cuts and increased government spending begin to wane.

In a separate report, the Labor Department said Thursday that the number of Americans filing for unemployment benefits fell to 223,000 last week, a drop of 3,000 from the previous week. Benefit applications, a proxy for layoffs, have been at ultra-low levels for an extended period, underlining the strength of the U.S. labor market. The government on Friday will release the February unemployment report. Many economists believe it will show unemployment edged back down to 3.9 percent, from 4 percent in January.