American workers were less efficient in the July-September quarter, pushing down productivity for the first time since late 2015.
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 a key ingredient in raising living standards. It enables companies to lift worker pay without raising prices on customers.
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 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.
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.
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.