U.S. productivity falls in fourth quarter; labor costs rise

WASHINGTON (Reuters) - U.S. worker productivity unexpectedly fell in the fourth quarter, the first decline since early 2016 and an indication that it be difficult to boost annual economic growth to 3 percent on a sustainable basis.

FILE PHOTO: Construction workers are seen at The Moynihan Train Hall in New York City, U.S., August 17, 2017. REUTERS/Brendan McDermid

The Labor Department said on Thursday nonfarm productivity, which measures hourly output per worker, fell at a 0.1 percent annualized rate in the October-December period. That was the first drop and weakest performance since the first quarter of 2016.

Third-quarter productivity was revised to show it rising at a pace of 2.7 percent instead of the previously reported 3.0 percent rate. Compared to the fourth quarter of 2016, productivity increased at a rate of 1.1 percent.

Economists polled by Reuters had forecast productivity rising at a 1.0 percent pace in the fourth quarter.

Productivity increased 1.2 percent in the 2017, the strongest performance since 2015, after dipping 0.1 percent in 2016.

Economists blame soft productivity on a shortage of workers, which could be an obstacle to faster economic growth. The Trump administration has slashed income taxes as it seeks to lift annual economic growth to 3.0 percent.

Other economists also argue that low capital expenditures, which they say has resulted in a sharp drop in the capital-to-labor ratio, is holding down productivity.

There is cautious optimism that the sharp reduction in the corporate income tax rate to 21 percent from 35 percent will boost capital expenditures. Annual economic growth has not surpassed 3.0 percent since 2005. Gross domestic product expanded 2.3 percent in 2017.

Hours worked increased at a rate of 3.3 percent in the fourth quarter, the fastest in three years, after rising at a 1.2 percent pace in the third quarter. Unit labor costs, the price of labor per single unit of output, rose at a pace of 2.0 percent pace in the final three months of 2017 after slipping at a rate of 0.1 percent in the third quarter.

Compared to the fourth quarter of 2016, unit labor costs rose at a rate of 1.3 percent. They gained 0.2 percent in 2017, the smallest increase since 2010, after rising 1.1 percent in 2016.

Reporting by Lucia Mutikani; Editing by Paul Simao