US productivity grew at a strong 2.9 percent in Q3

By Martin Crutsinger Ap Economics Writer
Wednesday, August 15, 2018

WASHINGTON — U.S. productivity grew at an annual rate of 2.9 percent in the second quarter, the fastest in more than three years, while labor costs actually fell.

The April-June increase followed a much weaker 0.3 percent rate of gain in the first quarter, the Labor Department reported Wednesday. It was the strongest advance since a 3.1 percent gain in the first quarter of 2015. But labor costs fell at a 0.9 percent rate in the second quarter, the weakest showing in nearly four years.

Productivity, a key factor determining how fast the economy can grow and how much living standards can increase, has been anemic. The strong second quarter gain is expected to be a temporary blip rather than a lasting improvement.

Productivity is the amount of output per hour of work. The big jump in the second quarter reflected the fact that the gross domestic product, the country's total output of goods and services, accelerated to a growth rate of 4.1 percent in the second quarter, the strongest quarterly gain since 2014.

That big jump in output in the second quarter was accompanied by a much smaller gain of 1.9 percent in the number of hours worked. The combination of stronger output and a smaller increase in hours worked led to the strong increase in productivity.

However, economists don’t expect the second quarter improvement will alter the long-run trend of very anemic gains in productivity.

For all of last year, productivity grew by 1.1 percent and that followed a minuscule 0.1 percent rise in 2016.

Finding a solution to the slowdown in productivity growth is a challenge facing the country. Rising productivity is needed to support increases in living standards. Productivity gains allow companies to pay their workers more without having to boost the cost of their products, which can increase inflation.

Economists are uncertain why productivity has been so anemic during the current nine-year expansion. For the past seven decades, productivity has turned in average annual gains of 2.1 percent. But between 2007 through 2017, productivity growth has slowed to about half that pace, with average annual gains of just 1.3 percent.

Without a significant improvement in productivity, the Trump administration will find it difficult to achieve its goal of GDP growth of 3 percent or better each year. An economy's potential for growth is determined by an expansion in the labor force, which is determined largely by birth rates and immigration, as well as the growth in productivity.