Worker Productivity Slows in Q4, Labor Costs Jump

U.S. worker productivity growth slowed more than expected in the fourth quarter, driving up labor costs, which bodes poorly for the near-term inflation outlook.

Nonfarm productivity, which measures hourly output per worker, increased at a 1.2% annualized rate last quarter after growing at an upwardly revised 2.3% pace in the July-September quarter, the Labor Department's Bureau of Labor Statistics said on Thursday.

Economists polled by Reuters had forecast productivity advancing at a 1.4% rate after increasing at a previously reported 2.2% pace in the third quarter. Productivity increased at a 1.6% rate from a year ago. It grew 2.3% in 2024, accelerating from 1.6% in 2023.

Productivity has expanded at a 1.8% rate since the fourth quarter of 2019, higher than the 1.5% pace in the prior business cycle that ran from the fourth quarter of 2007 through the fourth quarter of 2019. It is, however, below the long-term rate of 2.1% since the first quarter of 1947.

An upswing in productivity that started in 2023 led policymakers and economists not to be overly concerned about wages as a source of inflation. Progress lowering inflation to the Federal Reserve's 2% target stalled late last year, which has been acknowledged by the U.S. central bank.

The Fed left its benchmark overnight interest rate unchanged in the 4.25%-4.50% range last month, having reduced it by 100 basis points since September, when it embarked on its policy easing cycle. The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to tame inflation.

Unit labor costs - the price of labor per single unit of output - surged at a 3.0% rate in the October-December quarter. That followed a 0.5% growth pace in the third quarter, which was revised down from the previously reported 0.8% rate.

Labor costs increased at a 2.7% rate from a year ago. They grew 2.6% in 2024, up from 2.2% in 2023.

Hourly compensation increased at a 4.2% rate last quarter after advancing at a 2.9% pace in the third quarter. It grew at a 4.3% rate from a year ago. Compensation shot up 5.0% in 2024 after rising 3.9% in 2023.