WASHINGTON -- U.S. productivity grew at a solid 3.6% rate in the first three months of this year, the strongest quarterly gain in more than four years and a hopeful sign that a long stretch of weak productivity gains is coming to a conclusion.
The first-quarter increase in productivity was more than double the 1.3% rate of gain in the fourth quarter, the Labor Department reported Thursday. Labor costs actually fell in the first quarter, dropping at an annual rate of 0.9%, indicating that tight labor markets are not creating unwanted wage and inflation pressures.
If it continues, an uptick in productivity would be good news for President Donald Trump and his goal of achieving sustained economic growth above 3%. Productivity, the amount of output per hour of work, is a key factor determining an economy's growth potential.
With the strong gain in the first quarter, productivity over the past year has grown by 2.4%, the best four-quarter gain since a 2.7% rise in 2010. Increasing productivity suggests the economy can grow at a faster pace without spurring a big jump in inflation.
Productivity gains over the past decade have for the most part been lackluster, averaging annual gains of just 1.3% from 2007 through 2018. That was less than half the 2.7% gains seen from 2000 to 2007, a period when the economy was benefiting from technology improvements in computers and the Internet.
Thursday's report showed output rose at a 4.1% pace, while hours worked increased 0.5%; that gain was last slower in 2015.
From 1947 through 2018, annual productivity gains averaged 2.1%.
Economists have labeled the slowdown in productivity since the recession as one of the country's biggest challenges. However, recent signs have indicated that may be turning around. The economy's potential to grow is governed by two major factors, growth of the labor force and growth in productivity.
The overall economy, as measured by the gross domestic product, expanded at a surprisingly robust 3.2% annual rate in the first three months of this year. For all of 2018, gross domestic product growth was 2.9%. The Trump administration has projected sustained gains of 3% or better over the next decade, well above the 2.2% average gross domestic product gains seen since the current expansion began in June 2009.
Federal Reserve Chairman Jerome Powell on Wednesday brushed aside pressure for an interest-rate cut and said productivity is partly driven by technology developments and very hard to predict.
The U.S. economy is strong and the Fed is right not to lower interest rates further, according to BlackRock Inc.'s Rick Rieder.
"There's no need to shift rates down," Rieder, BlackRock's chief investment officer for global fixed income, wrote on Thursday. "The economy is doing quite nicely, so if both policy makers and politicians can leave it alone, then higher wages will eventually effectuate a slowing in the growth of inventory builds and corporate capital expenditures, which in turn will recalibrate growth moderately lower."
Powell has played down the threat of weak inflation by repeatedly noting it may be because of "transitory" factors.
"There is more dynamism to the U.S. economy today than many appear willing to admit, as more people are working, more people are receiving higher wages for lower-and middle-income jobs, and price levels aren't accelerating alongside of this remotely like they have in the past," he said. "The Fed should be cheering this fact and should get out of the way and let it continue for as long as possible."
In a separate report Thursday, the Labor Department said that applications for unemployment benefits, a proxy for layoffs, held steady at 230,000 last week. That is a low level that indicates a strong job market. The government will release its April jobs report today. In March, employers created 196,000 jobs while the unemployment rate stayed at 3.8%, the lowest level in nearly 50 years. Economists believe April job growth will remain strong.
Wage growth, long stuck in neutral, has found a higher gear.
Average hourly earnings in March were 3.2% higher than a year earlier, the eighth-straight month in which wage growth topped 3%. Today's jobs report most likely will show that the streak hit nine in April.
"We've spent several years going, 'Where is the wage growth? Where is the wage growth?'" said Martha Gimbel, an economist for the job-search site Indeed. "And it turns out we just had to wait a few years for the labor market to get tighter."
The recent gains are going to those who need it most. Over the past year, low-wage workers have experienced the fastest pay increases, a shift from earlier in the recovery, when wage growth was concentrated at the top.
The faster growth at the bottom is probably being fueled in part by recent minimum-wage increases in cities and states across the country. Research from the Economic Policy Institute, a liberal-leaning think tank, found that over the past five years, wages for low-wage workers rose 13% in states that raised their minimum wages, compared with 8.4% in states that did not.
But minimum wages are only part of the story. Ernie Tedeschi, an economist at Evercore ISI, estimates that the minimum-wage increases account for a quarter to a third of low-wage workers' gains over the past three years. The rest is most likely a result of a tightening labor market that is forcing employers to raise pay even for workers at the bottom of the earnings ladder.
Gimbel noted that better-paying industries had experienced faster job growth in recent months, while the fastest wage growth had been in lower-paying industries. That could indicate that sectors such as health care and manufacturing are snapping up workers, forcing retailers and restaurants to raise pay to compete.
Still, not everyone is benefiting equally. Black workers have seen smaller gains over the course of the recovery, for example. And wage growth remains slow in some parts of the country that were hit especially hard by the recession.
Information for this article was contributed by Martin Crutsinger of The Associated Press; by Reade Pickert and Joanna Ossinger of Bloomberg News; and by Ben Casselman of The New York Times.
Business on 05/03/2019