The Labour Department said on Wednesday that nonfarm productivity, which measures hourly output per worker, increased at a 0.9 per cent annualised rate in the April-June period. First-quarter productivity was revised to show it edging up at a 0.1 per cent pace instead of being unchanged as previously reported.
Compared to the second quarter of 2016, productivity increased at a 1.2 per cent rate, the strongest performance in two years. Economists had forecast productivity increasing at a 0.7 per cent pace in the second quarter.
With productivity rising, unit labour costs, the price of labour per single unit of output, increased at only a 0.6 per cent pace in the second quarter after jumping at a 5.4 per cent rate in the January-March period.
Compared to the second quarter of 2016, unit labour costs fell at a 0.2 per cent rate, pointing to muted inflation. Coming on the heels of a recent moderation in price pressures, the retreat in unit labour costs may worry some Federal Reserve officials as they contemplate further monetary policy tightening.
The government also revised productivity data going back to 2014, in line with recent revisions to gross domestic product figures. Those revisions showed productivity falling 0.1 per cent in 2016, the first drop since 1982.
Productivity increased at an average annual rate of 1.2 per cent from 2007 to 2016, below its long-term rate of 2.1 per cent from 1947 to 2016, indicating that the economy's potential rate of growth has declined.
"To reattain 3 per cent real GDP growth with the demographics the US is facing, productivity growth will have to exceed its long-run average growth rate of 2.1 per cent, and we are far short of attaining such a pace," said John Ryding, chief economist at RDQ Economics in New York.
Economists blame soft productivity on a shortage of workers as baby boomers retire as well as the impact of rampant drug addiction in some parts of the country. A report on Tuesday showed job openings surging to a record 6.2 million in June.
The International Monetary Fund in June cut its growth forecasts for the US economy to 2.1 per cent for both 2017 and 2018. The IMF said the Trump administration was unlikely to achieve its 3 per cent growth goal over a sustained period, partly because the labour market is at full employment.
Other economists also argue that low capital expenditure, which they say has resulted in a sharp drop in the capital-to-labour ratio, is holding down productivity.
There is also a perception that productivity is being inaccurately measured, especially on the information technology side. Annual economic growth has not surpassed 3 percent or more since 2005. Gross domestic product expanded at a 2.6 per cent annualised rate in the second quarter.
Hours worked increased at a rate of 2.5 per cent in the April-June period, the quickest pace since the fourth quarter of 2015, and followed a 1.6 per cent pace increase in the first quarter. As a result, output per worker surged at a 3.4 per cent rate, the fastest since the first quarter of 2015, after rising at a 1.8 per cent pace at the start of the year.