US productivity grows at tepid 0.7 percent rate in Q1

U.S. productivity grew at an annual rate of 0.7 percent in the first three months of this year, a weak reading but a slight improvement from the previous quarter.

The first quarter increase followed an even weaker 0.3 percent gain in the fourth quarter of last year, the Labor Department reported Thursday. Labor costs rose at a 2.7 percent rate in the first quarter, the fastest gain in a year.

Productivity, the amount of output per hour of work, is a key factor determining how fast the economy can grow and how much living standards can increase. Gains in productivity allow companies to pay their workers more without having to boost the cost of their products, a move that can increase inflation.

Productivity gains have been lackluster for most of this recovery, increasing just 1.3 percent for all of 2017. Economists are uncertain why productivity has been so tepid.

For the past seven decades from 1947 through 2017, productivity has turned in average annual gains of 2.1 percent. But between 2007 through 2017, growth has slowed to about half that pace with average annual gains of just 1.2 percent.

In 2016, productivity had failed to grow at all, marking the poorest performance in 35 years.

Without improvements, the Trump administration will have difficulty achieving its goal of doubling the rate of economic growth to 3 percent or better. An economy's potential for growth is determined by growth in the labor force, which is determined largely by birth rates and immigration, as well as the growth in productivity.

The 2.7 percent rise in labor costs in the first quarter followed a 2.1 percent increase in the fourth quarter and was the best showing since a 4.8 percent surge in the first quarter of 2017.

The 0.7 percent gain in productivity in the first quarter reflected the fact that the gross domestic product, the total output of goods and services, grew at an annual rate of 2.3 percent in the first quarter, slightly slower than the 2.9 percent in the fourth quarter.

In a separate report, the Labor Department said that the number of Americans filing claims for unemployment benefits, a proxy for layoffs, edged up a slight 2,000 to a still-low 211,000 last week. Even with the slight increase, jobless claims remained below 300,000 for a record 165th week. That stretch exceeds the old record of 161 weeks set back in the period from Jan. 7, 1967, to April 4, 1970.

A strong labor market has pushed the unemployment rate down to a 17-year low of 4.1 percent, where it has been for the past five months. The April jobs report will be released Friday and analysts are looking for another strong report with some forecasting that the jobless rate may have fallen to 4 percent last month.