The first quarter gain was more than double the 1.3% increase in the fourth quarter, although it was slightly lower than an initial estimate of 3.6% made a month ago. Labor costs fell during the first quarter, declining by 1.6% following a 0.4% drop in the fourth quarter.
Productivity, the amount of output per hour of work, is a key factor determining an economy’s growth potential. If the current rebound continues, it would provide support for President Donald Trump’s efforts to achieve sustained 3% growth rates.
The slight downward revision in productivity reflected the fact that overall output, as measured by gross domestic product, was revised down from an initial estimate of 3.2% growth to 3.1% growth in the first quarter.
The 3.4% advance in productivity was the strongest increase since a 3.7% rise in the third quarter of 2014. Productivity has risen 2.4% over the past four quarters, the best performance since a 2.7% four-quarter gain in 2010.
Productivity gains over the past decade have been lackluster, averaging just 1.3% annually from 2007 through 2018. That was less than half the 2.7% gains seen from 2000 to 2007, a period when the economy was benefiting from technology improvements in computers and the internet. From 1947 through 2018, annual productivity gains averaged 2.1%.
Economists see the slowdown in productivity over the past decade as one of the country’s biggest economic challenges. But recent signs indicate that may be turning around. The economy’s potential to grow is governed by two major factors, growth of the labor force and growth in productivity.
For all of 2018, GDP growth was 2.9%. The Trump administration has projected sustained GDP gains of 3% or better over the next decade, well above the 2.2% average GDP gains seen since the current expansion began in June 2009.
In a separate report Thursday, the Labor Department said that applications for unemployment benefits, a proxy for layoffs, held steady at 218,000 last week. That is a low level that indicates a strong job market. The government will release its May jobs report on Friday.