U.S. productivity growth remains weak in Q4 2017

Productivity growth in the U.S. continues to be weak in the fourth quarter. Growth dropped 0.1 percent, as compared with a revised 2.7 percent in the third quarter. On the contrary, unit labor costs were up 2 percent in the quarter, rising from a small decline of 0.1 percent in the third quarter. The volatility in the data was not unexpected, as the hurricanes that struck the U.S. put a vital halt to hiring at the end of the third quarter, noted Barclays in a research.

Therefore, measured productivity for the September quarter was high, given momentum in activity and a temporary halt in hiring. Thus, as the shortfall in September hiring was rebounded in the fourth quarter, unit labor costs recovered, which had the impact of suppressing measured productivity.

Nonfarm business output rose 3.2 percent sequentially in the fourth quarter, as compared with the 4 percent growth seen in the prior quarter. This underpinned most of the improvement in productivity last year. But employee hours in the fourth quarter recovered sharply, rising 3.3 percent, as compared with 1.2 percent in the third quarter. Compensation per hour was up 1.8 percent and, adjusted for inflation, fell 1.8 percent.

Unit labor costs were up 2 percent, the most solid reading since the first quarter of 2017. This pattern is viewed as driven by the post-hurricane rebound in hiring against a modest deceleration in nonfarm business output, stated Barclays.

On a year-on-year basis, productivity growth was up 1.1 percent, about where it has been on average for most of the rebound.

“We see some potential for productivity to rise in the coming years if the Tax Cut and Jobs Act, along with buoyant and synchronized global growth, induces a sustained acceleration in business investment spending”, said Barclays.

Unit labor costs rose 1.3 percent year-on-year in the fourth quarter and compensation per hour is up 2.4 percent year-on-year. This is consistent with the signal from average hourly earnings and the employment cost index.

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