US Q4 productivity revised to show a less steep decline

A welder builds parts for finished petroleum tanks at Southern Tank and Manufacturing in Owensboro, Kentucky.
Ty Wright | Bloomberg | Getty Images

U.S. nonfarm productivity fell less steeply than previously thought in the fourth quarter, but still pushed up labor-related costs as companies employed more workers to raise output.

The Labor Department said on Thursday that productivity, which measures hourly output per worker, decreased at a 2.2 percent annual rate and not the 3.0 percent pace it reported last month. It was still the biggest drop since the first quarter of 2014.

Economists polled by Reuters had expected fourth-quarter productivity would be revised to show it contracting at a 3.2 percent rate. Productivity increased at a 2.0 percent rate in the third quarter and rose only 0.7 percent in 2015 - the smallest gain since 2013.

The weak productivity reflects a slowdown in gross domestic product growth during the quarter and an acceleration in the pace of hiring.

Economic growth slowed to a 1.0 percent rate in the final three months of 2015 from a 2.0 percent pace in the third quarter, while nonfarm payrolls increased by an average 279,000 jobs per month.

Productivity increased at a annual rate of less than 1.0 percent in each of the last five years. The average annual rate of productivity growth from 2007 to 2015 was 1.2 percent, well below the long-term rate of 2.2 percent from 1947 to 2015.

While weak productivity has boosted employment growth as companies hire more workers to increase output, sustained weakness could undermine Americans' living standards. Soft productivity has significantly lowered the economy's long-run potential.

Economists blame the weakness on a lack of investment, which they say has led to an unprecedented decline in capital intensity. Some also believe productivity is being mismeasured, especially on the information technology side.

In the fourth quarter, hours worked increased at a 3.2 percent rate, instead of the 3.3 percent pace reported last month. Growth in unit labor costs, the price of labor per single unit of output, was revised down to a 3.3 percent rate from a 4.5 percent pace.

Higher labor costs, if sustained, could squeeze companies' profit margins. But for now, the trend in labor cost increases remains moderate. Unit labor costs increased at a 0.4 percent rate in the third quarter and rose 2.1 percent in 2015.

Compensation per hour increased at a 1.1 percent rate in the fourth quarter, rather than the 1.3 percent pace reported last month.Compensation increased 2.8 percent in 2015.