US productivity rises in Q2; labour costs in check
WASHINGTON: US productivity grew more than expected in the second quarter as hours worked rose at their fastest pace in 1½ years, leading to a modest increase in labour costs that could keep inflation muted in the near term.
The trend in productivity, however, remains weak, suggesting robust economic growth will be hard to achieve. President Donald Trump has vowed to boost annual growth to 3 per cent through tax cuts, infrastructure spending and regulatory rollbacks.
“The economy is aging and the growth rate for this eight-year expansion may have maxed out unless all the king’s horses and all the king’s men on Trump’s economics team can get some of its tax reforms, tax cuts, and untangled regulatory reforms through a moribund Congress,” said Chris Rupkey, chief economist at MUFG in New York.
The Labour Department said on Wednesday that nonfarm productivity, which measures hourly output per worker, rose at a 0.9 per cent annualised rate in the April-June period. First-quarter productivity was revised to show it edging up at a 0.1 per cent pace instead of being unchanged as previously reported.
Compared to the second quarter of 2016, productivity increased at a 1.2 per cent rate, the strongest performance in two years. Economists had forecast productivity increasing at a 0.7 per cent pace in the second quarter.
With productivity rising, unit labour costs, the price of labour per single unit of output, increased at only a 0.6 per cent pace in the second quarter after jumping at a 5.4 per cent rate in the January-March period.
Compared to the second quarter of 2016, unit labour costs fell at a 0.2 per cent rate. Coming on the heels of a recent moderation in inflation, the retreat in unit labour costs may worry Federal Reserve officials as they contemplate further monetary policy tightening.
“This recent softness in the data means that there could be less pressure for firms to pass higher costs on to consumers through price increases,” said Daniel Silver, an economist at JPMorgan in New York.
US financial markets were little moved by the data as investors focused on rising tensions between the United States and North Korea. Prices for US Treasuries rose in a move to safe-haven assets, while stocks on Wall Street fell.
The dollar was slightly weaker against a basket of currencies.
The government also revised productivity data going back to 2014, in line with recent revisions to gross domestic product figures. Those revisions showed productivity falling 0.1 per cent in 2016, the first drop since 1982. Productivity increased at an average annual rate of 1.2 per cent from 2007 to 2016, below its longterm rate of 2.1 per cent from 1947 to 2016, indicating the economy’s potential growth rate has declined. “To reattain 3 per cent real GDP growth with the demographics the US is facing, productivity growth will have to exceed its long-run average growth rate of 2.1 per cent, and we are far short of attaining such a pace,” said John Ryding, chief economist at RDQ Economics in New York.
Economists blame soft productivity on a shortage of workers as well as the impact of rampant drug addiction in some parts of the country. A report on Tuesday showed job openings surged to a record 6.2 million in June.