U.S. Productivity Fell for Third Straight Quarter

U.S. worker productivity declined this spring for the third straight quarter, extending a long stall in labor-productivity growth that threatens to restrain worker pay and the broader economy ahead.

Nonfarm business productivity, measured as the output of goods and services produced by American workers per hour worked, decreased at a 0.5% seasonally adjusted annual rate in the second quarter as hours increased faster than output, the Labor Department said Tuesday.

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Productivity had declined at a 0.6% pace in the first quarter, unrevised from an earlier estimate, and dropped at a 2.4% pace in the final three months of 2015.

Productivity in the second quarter was down 0.4% from a year earlier, the first annual decline in three years.

Unit labor costs at nonfarm businesses rose at a 2.0% annual rate in the spring after falling at a 0.2% pace in the first quarter, which was revised down from a previous estimate of growth at a 4.5% annual rate.

Compared with a year earlier, unit labor costs were up 2.1% in the second quarter.

Economists surveyed by The Wall Street Journal had expected productivity to rise at a 0.4% rate and unit labor costs to increase at a 1.8% pace during the second quarter.

The pace of productivity growth is a key factor in determining how quickly worker pay and overall economic output can grow over time without stoking higher inflation. Strong productivity gains, as seen in the late 1990s and early 2000s, can translate into robust economic growth and rising inflation-adjusted wages. But sluggish productivity growth can restrain wage and economic growth.

Productivity growth started to slow before the 2007-2009 recession and has all but stalled in recent years. Annual growth averaged 1.3% in 2007 through 2015, just half the average pace of 2.6% in 2000 through 2007, according to the Labor Department.

Federal Reserve Chairwoman Janet Yellen in June described the outlook for productivity growth as a "key uncertainty for the U.S. economy" that will help determine the future trend for living standards.

"Understanding whether, and by how much, productivity growth will pick up is a crucial part of the economic outlook," Ms. Yellen said. "But this is a very difficult question, and economists are divided. Some are relatively optimistic, pointing to the continuing pace of innovations that promise revolutionary technologies, from genetically tailored medical therapies to self-driving cars. Others believe that the low-hanging fruit of innovation largely has been picked and that there is simply less scope for further gains."

She described herself as "cautiously optimistic" but said it "would be helpful to adopt public policies designed to boost productivity," such as promoting investment.

Business investment has been a notable sore spot for the economy in recent months. A closely watched measure of business spending, fixed nonresidential investment, has declined for the past three quarters according to Commerce Department data. A proxy for spending on new equipment, new orders for nondefense capital goods excluding aircraft, has declined on a year-over-year basis almost continuously for the past year and a half.

Some of the weakness has come from the mining industry. Capital expenditures at Baker Hughes Inc. were down 19% in the second quarter compared with the first quarter and plunged 73% from a year earlier. The Houston-based oil-field-services firm and the broader U.S. energy sector have been squeezed by a two-year slump in oil prices.

"During this downturn, we have been extremely disciplined in our capital deployment and going forward, we will continue to maintain the same rigor," Chief Financial Officer Kimberly Ross told analysts last month.

The outlook could be set to brighten. A recent Business Roundtable survey of business executives found more U.S. firms planned to ramp up their capital expenditures and fewer planned to cut back on investment compared with earlier in 2016.

Defense contractor Raytheon Co. in late July reported its operating margins improved in the second quarter, which Chief Financial Officer Toby O'Brien told analysts was partly "the payoff from our investment in factory automation and equipment upgrades."

Sluggish productivity growth and rising labor costs could fuel higher inflation if firms passed along higher expenses to customers in the form of higher prices, though the precise relationship between prices and wages remains ambiguous. Fed researchers last year said they found little evidence of a link in recent years between labor costs and price inflation. U.S. inflation has undershot the Fed's 2% target for more than four years.

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com and Josh Mitchell at joshua.mitchell@wsj.com

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