Revised Q4 2017 productivity flat, vs the initial estimate of a 0.1% drop

Sergio Flores | Bloomberg | Getty Images

A worker installs glass to a window frame at the Pella Corp. manufacturing facility in Pella, Iowa.

U.S. unit labor costs increased faster than initially thought in the fourth quarter amid weak worker productivity, but the trend pointed to a gradual increase in inflation.

The Labor Department said on Wednesday that unit labor costs, the price of labor per single unit of output, rose at a 2.5 percent annualized rate in the last quarter instead of increasing at a 2.0 percent pace as reported last month.

Unit labor costs rose at a 1.0 percent rate in the third quarter. Compared to the fourth quarter of 2016, they increased at a 1.7 percent rate. Costs increased 0.4 percent in 2017, revised up from the previously reported 0.2 percent gain.

Inflation is expected to accelerate this year, driven by rising commodity prices and tightening labor market conditions. The labor market is considered to be either near or a little beyond full employment. Inflation has consistently undershot the Federal Reserve’s 2 percent target since mid-2012.

The increase in hourly compensation in the fourth quarter was revised up to a 2.4 percent rate from the previously reported 1.8 percent rate.

Worker productivity was revised to show it unchanged instead of declining at a 0.1 percent rate as reported last month. Productivity grew at a 2.6 percent rate in the third quarter and increased at a 1.1 percent rate compared to the fourth quarter of 2016.

Worker productivity has increased at an average annual rate of 1.2 percent from 2007 to 2017, below its long-term rate of 2.1 percent from 1947 to 2017. Sluggish productivity could make it difficult for the Trump administration to lift annual economic growth to 3 percent on a sustainable basis.

Annual economic growth has not surpassed 3.0 percent since 2005. Gross domestic product expanded 2.3 percent in 2017.

The government slashed the corporate income tax rate to 21 percent from 35 percent in January and there is cautious optimism that businesses will use some of the windfall from the $1.5 trillion tax cut package to buy machinery and other equipment to boost productivity.