US worker productivity falls in Q2 , causing annual decline

America’s nonfarm productivity unexpectedly stayed in contraction during the second quarter, despite an increase in labor-related production costs.

Productivity fell at an annual rate of 0.5 percent in the second quarter after a 0.6 percent drop during the first three months of the year, the Labor Department said Tuesday.

Economists had expected that productivity, which measures hourly output per worker, would rise 0.4% during the reported period.

The downside: it can be inflationary, though recent data has presented a muddled picture of whether unit labor costs are rising faster or not. Higher productivity is regarded as the key to a rising standard of living over time because it tends to lead to higher pay for workers and larger profits for companies. The growth rate is roughly half the already tepid average of the seven-year recovery from the Great Recession. The economy expanded at a 1.2 per cent annualized rate, according to Commerce Department data released July 29.

Janet Yellen the Chairwoman at the Federal Reserve said in June that the outlook for growth in productivity was an important uncertainty for the economy in the US that would help to determine the trends for the future for standards of living.

One silver lining is that lower productivity growth means firms may need to hire more since each worker produces less – as long as demand for goods and services remains strong. Some are relatively optimistic, pointing to the continuing pace of innovations that promise revolutionary technologies, from genetically tailored medical therapies to self-driving cars.

She described herself as “cautiously optimistic” but said it “would be helpful to adopt public policies created to boost productivity”, such as promoting investment.

Growth continued to disappoint in the second quarter.

Some weakness came from the US mining industry. A recent Business Roundtable survey of business executives found more USA firms planned to ramp up their capital expenditures and fewer planned to cut back on investment compared with earlier in 2016. So far, inflation overall has been tame, running well below the Fed’s 2 percent target.