Q3 Productivity Growth

U.S. workers increased output per hour in the third quarter at the best rate in three years, representing that slow productivity gains might finally be breaking out. According to the Labor Department, nonfarm business-sector productivity increased 3.0% in the third quarter.

“The third quarter of 2017 is a big turnaround from the results we have seen in previous years, suggesting that real wages could be on the rise soon,” said Keith Knutsson of Integrale Advisors.

Production output rose at a 3.8% rate during the third quarter, while hours worked were up 0.8%. Furthermore, the broader trend is national productivity, which increased 1.5% from a year earlier. From 1947 to 2016, labor productivity rose at an average of 2.1% per year. From 2007-2016, the average yearly increase has been 1.2%.

Although these numbers are not discouraging, productivity would need to advance better than the recent pace to keep the economy growing near a 2% rate. One of the reasons is labor supply. With an increased life expectancy and an aging population, this provides limitations as to how much labor supply can grow. The Labor Department estimates the labor force will grow at a 0.7% annual rate through 2026.

The Congressional Budget Office projected that nonfarm business productivity would advance 1.7% over the next decade. The Trump administration has targeted economic growth of at least 3% annually, a pace that has been achieved in the past two quarters. For such growth to continue over the longer run, productivity would need to improve or the labor supply would need to increase above projected rates.