U.S. productivity shows first quarterly decline in nearly two years

U.S. productivity edged down at a 0.1 percent rate in the fourth quarter—the weakest showing in nearly two years.

The fourth quarter decline followed a much stronger 2.7 percent gain in the third quarter, the Labor Department reported Thursday. Labor costs increased at a 2 percent rate in the fourth quarter after two quarters of declines.

For the year, productivity rose 1.2 percent, a rebound from a decline of 0.1 percent in 2016, which had been the first annual decline in 34 years. But the rebound still left the average productivity gain over the last decade at 1.2 percent, less than half the 2.6 percent average annual increases seen from 2000 to 2006.

In a separate report, the government said the number of Americans filing applications for unemployment benefits edged down last week by 1,000, to 230,000. These weekly applications, a proxy for layoffs, have been below 300,000 for more than three years, the longest stretch in more than four decades.

The government on Friday will report the unemployment rate for January. It has been at a 17-year low of 4.1 percent for the past three months, and some economists are looking for it to dip to 4 percent in January.

The 0.1 percent dip in productivity in the fourth quarter was the first quarterly decline in productivity since a 1.2 percent drop in the first quarter of 2016.

Productivity, the amount of output per hour of work, is the key factor governing rising living standards. If productivity is increasing, it allows companies to pay their workers more without having to boost the cost of their products, a move that can increase inflation.

Finding a way to increase productivity is seen as the biggest challenge facing the economy right now.

Without improvements in productivity, the Trump administration will have a difficult time achieving its goal of raising 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 primarily governed by birth rates and immigration, and the growth in productivity.

For the fourth quarter, GDP grew at an annual rate of 2.6 percent, a solid performance but down slightly from the gains of just above 3 percent in the second and third quarters of last year. The fourth quarter rate is based on a preliminary number and still subject to revision.