U.S. Productivity Increases by the Most in More Than a Year

(Bloomberg) -- U.S. productivity surged last quarter by the most in more than a year, reflecting a sharp acceleration in economic output, while labor costs growth cooled.

Fourth-quarter nonfarm business employee output per hour increased at a 6.6% annual rate from the previous three months, the largest advance since the second quarter of 2020, according to Labor Department figures Thursday. In the third quarter, productivity slumped 5%, the sharpest drop since 1981.

Productivity rates can be extremely volatile. On a year-over-year basis, output per hour rose 2%.

“Buoyant productivity acted as a buffer against rising compensation growth” in the fourth quarter, Oxford Economics' Lydia Boussour and Kathy Bostjancic said in a note. “While this is encouraging, we expect rising labor costs will put downward pressure on companies' profit margins this year.”

With the help of widespread vaccinations and another massive wave of government stimulus, the U.S. economy grew last year at the strongest pace since the 1980s despite persistent supply constraints. At the same time, the labor market rebounded rapidly from the unprecedented job losses seen in 2020, dramatically driving up the number of hours worked across the economy.

In the fourth quarter, economic output accelerated at a 9.2% pace, according to the report, while hours worked rose 2.4%.

A host of factors -- like early retirements, Covid-19 fears and child care challenges -- shrank the pool of available workers, leaving businesses scrambling to fill a record number of vacancies. Employers bid up wages and offered a variety of other incentives to attract and retain workers. In 2021, employment costs rose by the most in two decades.

Labor Costs

Unit labor costs, or hourly compensation adjusted for productivity, rose at a 0.3% rate in the fourth quarter following a 9.3% gain in the previous three months. Compared with the fourth quarter of 2020, labor costs rose 3.1%.

The recent run-up in labor costs has heightened concerns about the persistence of high inflation, which is already the fastest in nearly 40 years. When faced with heightened costs, businesses often look to improve worker productivity by investing in equipment, automation and other technological improvements.

As a result, rising productivity can help offset the inflationary impact of wage increases.

Despite the rapid increases in wages, though, they're still not keeping up with inflation. Real average hourly compensation fell an annualized 1.2% from the prior quarter after dropping at a 2.6% pace.