U.S. productivity slowed in third quarter

U.S. productivity grew at an annual rate of 2.2% in the third quarter, a slowdown from the previous quarter but still better than the lacklustre gains of the last decade. Labour costs accelerated but remained at a low level.

The rise in productivity in the July-September period followed a 3% rate of increase in the second quarter, which had been the strongest figure in three years. Labour costs rose at a 1.2% rate after having fallen at a 1% rate in the second quarter.

Productivity, the amount of output per hour of work, has been weak throughout the current recovery that began in June 2009. Analysts have been unable to come up with definitive reasons for the slowdown.

Productivity last year rose by just 1.1%. Over the past decade, productivity has been up at an average annual rate of 1.3%, just about half the 2.1% gains seen in the seven decades starting in 1947. The period from 2000 to 2007 saw even stronger annual gains of 2.7%, a burst that was credited to efficiency improvements achieved with the introduction of high-tech computers and other devices to the workplace.

A slowdown in the third quarter had been expected given that overall output, as measured by the gross domestic product, slowed to a still-strong annual rate of 3.5% in the April-June quarter after a sizzling 4.2% growth rate in the second quarter. With less output and hours worked rising at a rate of 1.8%, productivity edged lower.

Economists said they were not concerned about the slight acceleration in labour costs. The Federal Reserve closely watches various gauges of compensation to make sure that wages and salaries, the biggest component of business expenses, are not rising at such a rapid pace that the economy could be in danger of overheating.

“Any rise in core inflation from here will be very modest, allowing the Fed to continue with its policy of gradually normalizing interest rates,” said Paul Ashworth, chief U.S. economist at Capital Economics.

Finding a solution to the slowdown in productivity growth is one of the key economic challenges facing the country. Rising productivity is critical to boosting standards of living because productivity gains allow companies to pay workers more without having to increase the cost of their products, which can be inflationary.

Economists are uncertain why productivity has remained static during a nine-year expansion. Some explanations include the difficulty of pulling out of the deep 2007-2009 recession and reluctance of companies to invest in new productivity-enhancing equipment.

Without a significant improvement in productivity, the Trump administration will find it difficult to achieve its goal of sustained GDP growth of 3% or better each year. An economy’s potential for growth is determined by an expansion in the labour force, which is determined largely by birth rates and immigration, as well as the growth in productivity.

In a separate report, the Labor Department said that the number of Americans filing claims for unemployment benefits, a proxy for layoffs, dipped by 2,000 last week to 214,000, further evidence of a healthy labour market. The government will release the October unemployment report on Friday, and the expectation is that the jobless rate will remain at a 49-year low of 3.7%.

Trade disputes impacting manufacturers

American manufacturers grew at a slower pace in October as factories contended with supply disruptions caused by trade disputes with China, Europe and other trading partners.

The Institute for Supply Management, an association of purchasing managers, says its manufacturing index slipped to 57.7 last month from 59.8 in September. Anything above 50 signals growth; manufacturers are enjoying a 26-month winning streak.

New orders, production, export orders and hiring grew more slowly. Thirteen of 18 manufacturing industries reported growth last month, led by textile mills.

American industry is generally healthy, but respondents to the ISM survey suggested that trade disputes are taking a toll. The United States has imposed taxes on imported steel and aluminum and on about $250 billion in Chinese products, drawing retaliation from U.S. trading partners.

U.S. homebuilders struggling

Spending on U.S. construction projects was essentially unchanged in September, the weakest showing since June, as an increase in home construction was offset by a slide in spending on government projects.

The Commerce Department said Thursday that the flat reading for September followed a 0.8% rise in August.

The strength last month was driven by a 0.6% increase in residential construction and a smaller 0.1% increase in non-residential activity, which pushed this category to an all-time high. However, these gains were offset by a 0.9% drop in spending on government projects.

The increase in residential construction featured an 8.7% jump in apartment construction, which offset a 0.8% drop in single-family homes.

Apartment construction can be volatile from month to month. Overall, the home sector has struggled for much of this year as builders have had to cope with rising costs for land, lumber and labour. Part of the increase in lumber prices stemmed from the higher tariffs the Trump administration has imposed on Canadian softwood lumber.

Residential construction has been a drag on the overall economy, falling every quarter this year. While business construction was strong in the first two quarters, it fell at a 7.9% rate in the July-September quarter. The decline was viewed as a potentially worrisome sign that the boost businesses received in bigger tax breaks for investment from the US$1.5-trillion tax cut passed last December may be starting to wane.

While overall construction was flat last month on a percentage basis, it did climb enough to push total spending to a record annual rate of US$1.33 trillion.

The 0.1% rise in private non-residential construction boosted that category to a record annual rate of US$463.9 billion, thanks to gains in hotel construction and office building, which offset a drop in spending in the category that includes shopping centres.