U.S. productivity growth rebounds in Q4 2019

U.S. productivity rose 1.4 percent quarter-on-quarter and 1.8 percent year-on-year in the fourth quarter of 2019. This is a rebound from the third quarter due to slower growth in hours worked. Non-farm business output grew at a pace widely similar to that for most of 2019. It appears that self-employed hours introduced considerable volatility to the 2019 data, leading to interpret the overall productivity numbers for last year with caution, noted Barclays in a research report.

The BLS showed that the self-employed hours made an unusually large contribution to growth in the third quarter, after having fallen sharply in both the first quarter and second quarter. This is one of the more volatile components of hours worked, and despite of its small weight, it drove the softness in “all workers” hours worked in the first half of 2019 and the subsequent recovery in the third quarter.

The year-on-year productivity grew stronger than the average pace in the current expansion and in line with its average during last year. Throughout the rebound, productivity growth had been quite weak, rising on average by 1 percent year-on-year, around 100 basis points below its historical norm. In 2019, its growth rate quickened, but the unusual volatility and softness in self-employed hours calls into question and implies that productivity growth might be rebounding at a more modest pace than last year’s data implied.

Unit labor costs rose 1.4 percent quarter-on-quarter and 2 percent year-on-year. The rise in ULC has been driven by a solid contribution from the compensation component. Fast-rising ULC and compensation can hurt business profitability, especially in the current environment of weak producer price inflation.

“A gradual shift toward faster productivity growth could improve the current economic environment in a number of ways. It would be consistent with better prospects for potential output, wage growth, and spare capacity for the US economy. These, in turn, could imply that there is room for GDP growth and labor markets to improve further without causing undue inflationary pressures on firms and consumers, and for firm profit margins to move higher as unit labor costs weigh less on profitability”, added Barclays.