US productivity slows to 1.6 per cent rate in Q3, while labour costs rebound

WASHINGTON – U.S. productivity slowed in the summer, while labour costs rebounded yet stayed at a level suggesting only modest inflation pressures.

Productivity rose at an annual rate of 1.6 per cent in the July-September quarter, a slowdown from a 3.5 per cent increase in the second quarter, the Labor Department said Thursday. Labor costs rose at a modest annual rate of 1.4 per cent in the third quarter after having fallen at a 1.8 per cent pace in the second quarter.

Productivity, the amount of output per hour of work, has slowed significantly in recent years. Economists are divided on the causes for the weakness. Over the past year, productivity is up just 0.4 per cent compared to average annual growth of 2.2 per cent from 1947 through 2014.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said that the productivity gain for the third quarter was much better than expected but described the long-term trend as disappointing.

“All we can say for sure is the productivity growth is very slow, showing no sustained signs of revival,” Shepherdson said.

Productivity saw a jump for a decade starting in 1995, gains that were attributed to improvements in computer software and the introduction of a number of high-tech products that helped workers do their jobs more efficiently. But in recent years, productivity growth has slowed significantly.

Some economists believe that reflects a temporary drop in business investment in new equipment, and they forecast a rebound in productivity growth to higher levels. However, other analysts worry that the country could be stuck in a prolonged period of weak productivity growth.

Productivity is a key factor to rising standards of living. It allows employers to pay their workers more to reflect the increased production without having to boost the cost of their products, which can trigger higher inflation.

The Federal Reserve closely monitors the rise in labour costs to see if inflation pressures are starting to build. However, the gains logged since the Great Recession have been modest.