Economic Report: U.S. productivity climbs 0.7% in first quarter, but it’s still a weak link for the U.S. economy


Bloomberg News/Landov

U.S. companies are providing more goods and services, but they aren’t particularly more productive in doing so. Here a largely automated plant in the Midwest makes beer nuts.

The numbers: The productivity of American businesses rose 0.7% in the first quarter, but there’s little sign of long-term improvement in what’s been a weak link for the U.S. economy.

Economists polled by MarketWatch had forecast a 0.9% increase following a revised 0.3% gain in the fourth quarter.

What happened: Output — or goods and services produced — increased 2.8%. Hours worked rose 2.1%. Productivity is determined by the difference between the two.

The cost of labor, meanwhile, rose sharply. Unit-labor costs, or how much it costs to make each product, climbed by 2.7%, perhaps a sign that a tight labor market and rising prices for raw materials are starting to pinch.

Read: Signs of higher U.S. inflation are popping up everywhere

The overall trend in labor costs is more muted, however. Unit-labor costs have risen a paltry 1.1% in the past four quarters.

Big picture: Productivity has been unusually low during the current expansion that began almost nine years ago. It rose 1.3% over the past four quarters, roughly the same amount its increased each year since 2007.

That’s still disappointingly low compared to the average 2.6% gain from 2000 to 2007. Or the 3.2% average from World War II to the end of the 20th century.

Read: Fed will make 4 rate hikes this year, economists now say

The Trump administration has sought to encourage businesses to invest more with the biggest corporate tax reductions in 30 years, but it’s still too early to tell if it’s working.

The hope is that increased business investment in technology, equipment and training will help workers to be more productive, leading to higher profits and wages. Higher productivity is the key to a better standard of living in the long run.

What they’re saying: “Productivity figures were in line with expectations. Quarterly figures can be choppy, but there’s nothing to suggest a dramatic pickup in output per worker (hence, limited upside for GDP growth),” wrote Scott Brown, chief economist at Raymond James.

Market reaction: The Dow Jones Industrial Average DJIA, -1.09% and Standard & Poor’s SPX, -0.99% declined in Thursday trades. The 10-year Treasury yield TMUBMUSD10Y, -1.16%   fell slightly to 2.94%.

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