U.S. fourth-quarter unit labor costs, productivity revised down

WASHINGTON (Reuters) - U.S. unit labor costs grew much slower than initially thought in the fourth quarter and were soft in 2019, suggesting inflation could remain tame despite tightening labor market conditions.

The Labor Department said on Thursday growth in unit labor costs - the price of labor per single unit of output - rose at a 0.9% rate last quarter, instead of the 1.4% pace reported last month.

Data for the third quarter was also revised down to show unit labor costs increasing at a 0.2% pace instead of advancing at a 2.5% rate as previously reported.

Compared to the fourth quarter of 2018, labor costs grew at a 1.7% rate, revised down from the 2.4% pace estimated in February.

Labor costs gained 1.7% in 2019 after rising 1.8% in 2018, suggesting inflation will probably continue to run below the Federal Reserve’s 2% target.

The Fed on Tuesday slashed its benchmark overnight interest rate by a half percentage point to a target range of 1.00% to 1.25%, citing risks to the economy from the coronavirus outbreak.

It was the U.S. central bank’s first emergency rate cut since the height of the financial crisis in 2008.

Nonfarm productivity, which measures hourly output per worker, increased at a revised 1.2% annualized rate last quarter. Productivity was previously reported to have rebounded at a 1.4% pace in the fourth quarter. It contracted at a 0.3% pace in the July-September period.

Economists polled by Reuters had expected productivity would be unrevised at a 1.4% rate in the fourth quarter.

Compared to the fourth quarter of 2018, productivity increased at an unrevised 1.8% rate. It accelerated 1.9% in 2019. That was the strongest since 2010 and was up from the 1.7% reported last month. Productivity increased 1.4% in 2018.

Sluggish productivity is one of the reasons the economy has struggled to achieve the Trump administration’s target of 3% annual GDP growth.

The economy grew 2.3% in 2019, the slowest in three years, after logging 2.9% growth in 2018.

Productivity increased at an average annual rate of 1.4% from 2007 to 2019, below its long-term rate of 2.1% from 1947 to 2019, indicating that the speed at which the economy can grow over a long period without igniting inflation has slowed.

Economists estimate the economy’s growth potential at around 1.8%. Some economists blame tepid productivity on a shortage of workers as well as the impact of rampant drug addiction in some parts of the country.

Others also argue that low capital expenditure, which they say has resulted in a sharp drop in the capital-to-labor ratio, is holding down productivity. There is also a belief that productivity is being inaccurately measured, especially on the information technology side.

Hours worked rose at a 1.2% rate in the fourth quarter, rather than the 1.1% pace estimated in February.

Reporting by Lucia Mutikani; Editing by Paul Simao