US productivity cooled in fourth quarter as labor costs picked up

U.S. productivity lost speed at the end of the year, while labor costs accelerated. For everyday investors, that combination matters because productivity growth can help companies absorb higher pay, while rising labor costs can add pressure to margins and inflation-sensitive expectations.

The Labor Department said Thursday that U.S. productivity increased at a 1.2% annual rate in the fourth quarter. That was down from a 2.3% gain in the previous three-month period.

The fourth-quarter reading also came in below expectations. Economists surveyed by The Wall Street Journal had forecast a 1.4% increase.

An annual rate shows what the quarter’s pace would look like if it continued for a full year. That makes the quarter-to-quarter slowdown easier to compare with other economic data that investors track, including hiring, wages and inflation.

Full-year productivity still improved

Even with the weaker fourth quarter, the Labor Department’s figures showed a better full-year performance. U.S. productivity rose at a 2.3% rate for the year, compared with 1.6% in 2023.

Productivity is one of the cleaner long-run signals in the economy because it connects growth to how efficiently labor is being used. Stronger productivity can support output without requiring the same increase in hours worked. A slower quarterly reading, like the one reported Thursday, points to a softer pace at the end of the year.

Labor-cost gauge accelerated

Unit labor costs moved in the opposite direction. The Labor Department said unit labor costs rose 3% in the fourth quarter, up sharply from a 0.5% increase in the prior quarter.

Unit labor costs are a wage-related measure that compares what businesses pay workers with the output those workers produce. When the measure rises faster, it can signal that labor is becoming more expensive for each unit of output.

The split in Thursday’s report is straightforward: productivity growth slowed from the third quarter, while the wage-cost measure climbed faster. That gives investors another data point for judging how the labor market and business costs are feeding into the broader economy.

• Fourth-quarter productivity: up 1.2% at an annual rate, according to the Labor Department.
• Prior quarter productivity: up 2.3%.
• Wall Street Journal economist forecast: up 1.4%.
• Full-year productivity: up 2.3%, compared with 1.6% in 2023.
• Fourth-quarter unit labor costs: up 3%, after a 0.5% rise in the prior quarter.

This story draws on original reporting from MarketWatch.