U.S. productivity finished 2017 with a surprising decline but economists are still hopeful for faster growth this year as the new tax law spurs business investment.
The Labor Department reported Thursday that output rose 3.2% in the fourth quarter while hours worked grew slightly faster at 3.3%. The difference between the two led to a 0.1% annualized decline in productivity.
It was the first drop and weakest performance since the first quarter of 2016. Economists polled by Reuters had forecast productivity rising at a 1.0% pace in the fourth quarter.
Productivity increased 1.2% in 2017, the strongest performance since 2015, after dipping 0.1% in 2016. It has risen by an average of 1.2% from 2007 to 2017 — well below the average 2.6% gain from 2000 to 2007 or the 3.2% average from World War II to the end of the 20th century.
“Economists blame soft productivity on a shortage of workers, which could be an obstacle to faster economic growth,” Reuters said, adding that low capital expenditures could also be holding down output.
MarketWatch noted that productivity “was expected to be weak in the fourth quarter after an unusually strong gain in the fall that may have been distorted by a spate of major hurricanes. Still, an outright decline was a disappointment, especially after a 5.7% spike in productivity among manufacturing firms that was the biggest since 2010.”
Third-quarter productivity was revised to show a gain of 2.7% instead of the previously reported 3.0%. Compared to the year-ago period, fourth-quarter productivity increased at a rate of 1.1%.
Reuters said the fourth-quarter decline indicates that it may be difficult to boost annual economic growth to 3% on a sustainable basis. But as MarketWatch reports, “Companies boosted investment in 2017 in anticipation of the Trump tax cuts and some economists think lower rates could uncap a gusher of new spending over the next few years.”
The fourth-quarter report “does not change our view that strengthening business capital expenditures will lift the trend in productivity growth this year to 1.5% or better,” said Ian Shepherdson of Pantheon Macroeconomics.