US productivity stuck in slow-growth mode

Friday, February 26, 2016, Vol. 40, No. 9

WASHINGTON (AP) — U.S. productivity fell in the final three months of 2015 at the sharpest pace in nearly two years, though the decline was not as large as first reported. Labor costs jumped in the fourth quarter at the fastest pace in a year.

The Labor Department said Thursday that productivity — the amount of output per hour of work — fell at an annual rate of 2.2 percent in the October-December period. Preliminary data had reported a 3 percent drop. Labor costs rose at a rate of 3.3 percent, revised from an initial 4.5 percent estimate.

For all of 2015, productivity rose just 0.7 percent, marking the fifth straight year of weak gains. It's a troubling trend given that productivity is a key ingredient needed for rising living standards. Rising productivity enables businesses to pay employees higher wages without having to boost the cost of the products and services they sell.

The Federal Reserve keeps watch on both productivity and labor costs as it deliberates how quickly it should raise interest rates to keep inflation under control. The Fed raised a key rate by a quarter-point in December, the first increase in nearly a decade. But weaker economic data and turbulent financial markets are likely to reduce the number of rate hikes this year from what had been an expected four down to perhaps just two.

Last week, the government reported that total output as measured by the gross domestic product expanded at an annual rate of 1 percent in the fourth quarter. That increase in output was reflected in the smaller decline in productivity reported Thursday.

Productivity recently has been growing well below the 2.1 percent average gains seen over the past 67 years. It had accelerated for a decade starting in 1995. Those gains were attributed to improvements in computer software and the introduction of technology that helped workers do their jobs more efficiently.

Some economists believe the recent slowdown in productivity is partly the result of a drop in business investment in new equipment, and they are forecasting an acceleration once business investment picks up. But other economists worry that the country may be stuck in a prolonged period of weak productivity growth.