U.S. productivity underwhelms at 0.9%

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The productivity of American workers rose just modestly in the spring, extending a worrisome issue.

Productivity grew at an annual rate of 0.9% in the April-June quarter, slightly better than a scant 0.1% rate of increase in the first quarter, the Labor Department reported Wednesday. Labour costs edged up at a 0.6% rate in the second quarter, a sharp slowdown from a 5.4% growth rate in the first quarter.

Productivity, the amount of output per hour of work, has been weak throughout the economic recovery, now in its ninth year. Many analysts say this is the biggest economic challenge facing the country.

For 2016 overall, productivity actually declined — the first fall in 34 years. Productivity last year had previously been reported as a slight increase of 0.2%. However, that gain evaporated as part of the government’s annual benchmark data revisions. It marked the first annual decline in productivity since a 1% drop in 1982.

The small improvement in the second quarter reflected the fact that overall economic growth, as measured by the gross domestic product, accelerated to a 2.6% rate of increase compared to a 1.2% gain in the first quarter.

“While the economy’s expansion […] is the third longest in the post-war era, it’s also the weakest (averaging 2.2%),” says BMO senior economist Sal Guatieri in a report on North American growth.

Since 2007, annual productivity increases have averaged just 1.2%. That’s less than half the average annual gains of 2.6% logged in 2000 to 2007, when the country was benefiting from increased efficiency from computers and the internet in the workplace.

Rising productivity means increased output for each hour of work, which allows employers to boost wages without triggering higher inflation.

The growth challenge
The challenge of boosting productivity back to the levels before the Great Recession of 2007-2009 will be a key factor in determining whether President Donald Trump will achieve his goal of boosting overall growth. The economy’s potential for growth is a combination of labour force expansion and growth in productivity.

During the campaign, Trump pledged to double growth to 4% or better. But since taking office, his administration has projected a slightly lower but still ambitious goal of pushing annual growth back up to 3%. Trump’s first budget projects that faster economic growth will produce US$2 trillion in deficit reduction over the next decade, a forecast most private economists view as overly optimistic.

“While job growth remains solid […] and financial conditions are supportive (led by record-breaking equities), the expansion will be restrained by worsening labour shortages,” says Guatieri. “For example, sales of new homes have been hampered by construction delays, partly due to a dearth of skilled workers. A proposal to curb immigration […] would exacerbate the shortages.”

He expects Q3 growth to moderate to 2.4%.

Transcontinental Media G.P.