US productivity likely weaker in fourth quarter

MarketsAssociated Press

The Labor Department issues its revised report on productivity in the fourth quarter Thursday at 8:30 a.m. Eastern.

SLOW GOING: The expectation is that productivity fell at an annual rate of 2.4 percent in the fourth quarter, according to economists surveyed by data firm FactSet.

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COST CRUNCH: In the initial estimate of productivity, the government said productivity fell at an annual rate of 1.8 percent in the fourth quarter while labor costs rose 2.7 percent. Economists believe the revised estimate will put the increase in labor costs at a higher 3.3 percent.

BIG PICTURE: Last week, the government reported that the overall economy, as measured by the gross domestic product, grew at an annual rate of 2.2 percent in the October-December quarter. That was lower than the government's initial estimate that GDP was growing at a 2.6 percent rate in the fourth quarter. Even that figure was much lower than the 5 percent GDP growth seen during the third quarter.

While falling productivity and rising labor costs are not favorable long-term trends, the figures can swing sharply from quarter to quarter.

Since the recession ended in mid-2009, labor costs have been contained as millions of people who lost their jobs during the downturn have struggled to find new employment. The unemployment rate fell in January stood at 5.7 percent, a significant improvement from the 10 percent high that unemployment hit in late 2009.

With the labor market tightening, economists are starting to watch for signs of rising wages. But with labor costs running at such a slow pace, they say it should be some time before that occurs.

For all of 2014, labor costs rose just 1.5 percent. That was up from a 0.2 percent gain in 2013 but still well within the range that economists view as a modest increase.

Productivity rose 0.8 percent for all of 2014, little changed from the modest 0.9 percent productivity gain seen in 2013.

The Federal Reserve keeps a close watch on productivity and labor costs for signs that inflation is nearing unwanted levels.

At the moment, the Fed is hoping that wages will start rising at a faster clip to help Americans catch up from a prolonged period when wage growth was weak.

For the past three years, inflation has been rising at rates well below the Fed's target of 2 percent annual price increases. In recent months, price gains have fallen further amid a big drop in oil prices and a stronger dollar that has made foreign-made goods cheaper for U.S. consumers.