Sharp fall in US labour productivity growth

The US economy last year recorded its lowest rate of labour productivity growth in more than a decade, with growth in output per hour worked falling behind the EU and Japan.

The fall casts further doubt on the ability of the Federal Reserve to cut interest rates as the US economy slows.

Research to be published today by the Conference Board, the international business organisation, shows that US labour productivity in the whole economy grew 1.4 per cent in 2006 as slower economic growth was combined with a rapid rise in employment. Gail Fosler, the chief economist of the board, said the fall was unlikely to be cyclical. Rather, it was a result of weaker gains in service industries, raising "concerns about the long-lasting productivity impact of information and communications technology". If weak productivity growth continued, she said, "even in a slow growth environment, the US economy will be performing close to its potential", restricting the Fed's ability to cut interest rates.

Investors now believe that there is only about a 10 per cent chance of a reduction in official interest rates by the May meeting of the Fed's interest rate-setting committee, according to the Federal Reserve Bank of Cleveland. The US slowdown in whole economy productivity growth over the past three years - to a rate half that in 2002 and 2003 - contrasts with rising productivity growth in Japan, on the back of a surge in manufacturing exports. Europe improved its productivity performance considerably last year as it enjoyed its first year of strong economic growth since 2000.

However, the improvement in Nordic countries and Germany masked continued weakness in southern Europe, where growth was generated by surging employment rather than an improvement in the efficiency of the economies of Spain, Italy and Portugal.

Productivity growth remained extremely high in the emerging countries of China, India and eastern Europe, as inefficient companies fell away and huge numbers of workers moved from agriculture to manufacturing.