U.S. productivity falls for first time in nearly 4 years

WASHINGTON – American workers were less efficient in the July-September quarter, pushing down productivity for the first time since late 2015.

With economic growth slowing, in part because the stimulus from Trump administration tax cuts is fading, many economists worry that worker productivity will follow suit. Most economists also believe that the Trump administration’s trade war with China has discouraged businesses from investing more in productivity-enhancing tools such as computers and machinery, offsetting the benefits from the 2017 corporate tax cut.

The Labor Department said Wednesday that productivity, a measure of economic output for each hour worked, fell 0.3% in the third quarter. The drop comes after two quarters of healthy gains.

Still, productivity has increased just 1.4% in the past year, about two-thirds of its long-run average. Weak productivity growth has been a hallmark of the current economic expansion, now in its 11th year. It is a key reason the overall economy has expanded more slowly than in previous expansions.

Greater productivity is an important ingredient in raising living standards. It enables companies to lift worker pay without raising prices on customers.

Economists noted that the data is volatile on a quarterly basis and said the negative reading is at least partly a blip. Still, it suggests recent increases in productivity may not last.

“With economic momentum poised to cool further in 2020 and the economy no longer fiscally-stimulated, we expect productivity gains to continue to fade,” Lydia Boussour, senior economist at Oxford Economics, a consulting firm, said.

The Trump administration promoted its 2017 corporate tax cut as a policy that would raise productivity by encouraging businesses to invest in more computers, machinery and other equipment. Productivity did pick up in the first half of this year after growing modestly in 2018, but it now appears to be dropping back to the slow growth that has occurred since the Great Recession ended.

Many economists blame President Donald Trump’s trade war with China for discouraging businesses from spending more on goods that would make workers more productive. The tariffs imposed by both countries have raised business’s costs and caused many executives to postpone plans to expand and invest.

“The trade policy situation has derailed (investment) to some degree,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “Firms seem to have stepped back.”

Still, Stanley said it is too early to determine whether or not the administration’s tax cuts have boosted investment.

Economists point to many different reasons for the current sluggish level of productivity growth. Some argue that new technologies, such as smartphones and mobile software, simply aren’t that economically useful. Others say that innovations like search engines, which are free to users, aren’t properly captured in government data.

The government’s report also shows that the low unemployment rate is driving up labor costs by forcing companies to pay more, a trend that could eventually raise inflation. For now, economists say that many corporations are absorbing the higher costs by reducing their profit margins, rather than passing the costs on to customers.

Labor costs rose at an annual rate of 3.6% in the third quarter, and are up 3.1% in the past year. That annual gain is the largest in more than five years. That higher pay could provide key support to consumer spending in the coming months.

The decline in productivity reflects slower economic growth combined with steady hiring. The economy grew just 1.9% in the third quarter, down from 2% in the second quarter and a 3.1% pace in the first three months of the year.