The Economy

U.S. Productivity Drops for Third Straight Quarter

Economists are concerned the continuing stall in ouput will restrain the growth of the economy as a whole.
Matthew HellerAugust 10, 2016

The latest U.S. productivity numbers showed a third straight quarterly decline, extending a long-term holding pattern that could keep a lid on the growth of the economy as a whole.

According to the Labor Department, productivity, which measures hourly output per worker, dropped at a 0.5% annual rate in the second quarter. Compared to the same period last year, output fell 0.4%, the biggest year-on-year decline in three years.

Economists surveyed by The Wall Street Journal had expected productivity to rise at a 0.4% rate compared to the first quarter. Productivity growth started to slow before the 2007-2009 recession and has all but stalled in recent years.

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“The pace of productivity growth is a key factor in determining how quickly worker pay and overall economic output can grow over time without stoking higher inflation,” the WSJ noted, adding that sluggish productivity growth can restrain wage and economic growth.

According to USA Today, the nation’s weak productivity explains why the economy has grown only about 1% at an annual rate in each of the last three quarters even while monthly job growth has averaged a healthy 210,000.

“The reason the economy has still been able to expand is because of labor input. Firms are hiring people at a reasonably healthy rate,” Joseph LaVorgna, chief economist at Deutsche Bank Securities in New York, told Reuters.

“However, we do not believe this can last, because strong hiring in the face of weak productivity necessarily implies a further deterioration in corporate profit margins,” he added.

Reuters said productivity has fallen as companies have been reluctant to invest in new equipment. A closely watched measure of business spending, fixed nonresidential investment, has declined for the past three quarters, according to Commerce Department data.

But there may a light at the end of the tunnel. A recent Business Roundtable survey of business executives found more U.S. firms planned to ramp up their capital expenditures and fewer planned to cut back on investment compared with earlier in 2016.

The Labor Department also reported that unit labor costs at nonfarm businesses rose at a 2.0% annual rate in the spring after falling at a 0.2% pace in the first quarter.