WASHINGTON – Worker productivity, the key factor in rising living standards, slowed sharply in the final three months of the year as overall economic activity weakened considerably and labor pressures increased.
The Labor Department reported Wednesday that productivity, the amount of output per hour of work, increased at an annual rate of 1.8 percent in the October-December quarter, down from a 6 percent performance in the July-September period. The slowdown reflected the fact that overall economic activity skidded to a near standstill in the final three months of the year, with the gross domestic product rising at a barely perceptible rate of 0.6 percent.
Labor costs rose by 2.1 percent in the final three months of the year, after having fallen by 1.9 percent in the third quarter and 1.1 percent in the second quarter.
The increase in productivity in the fourth quarter was nearly double what economists had been expecting, while the rise in labor costs was slightly lower than expected. However, analysts cautioned that much of the strength in productivity reflected a sharp drop in the number of hours being worked by the self-employed, while the huge jump in the third quarter reflected the big increase in economic output in that period.
“The productivity revival over the past few quarters will not last,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics, a private consulting firm.
Shepherdson said he looked for productivity to slow in 2008, reflecting an extremely weak economy in the first half of the year.
For the year, productivity rose by 1.6 percent, a slight rebound from a 1 percent gain in 2006 but both years were well below the average annual increases of 3.2 percent turned in from 2000 through 2004.
Productivity determines whether living standards can rise because it allows businesses to pay their workers more because of their increased output without having to raise the cost of their products, which increases inflation.