02/05/2015 03:40 EST | Updated 04/07/2015 01:59 EDT

US productivity falls at 1.8 per cent rate in Q4 while labour costs rise

WASHINGTON - U.S. worker productivity went into reverse in the final three months of the year, while labour costs increased.

Productivity, the amount of output per hour of work, fell at 1.8 per cent rate in the fourth quarter after rising at a 3.7 per cent rate in the third quarter, the Labor Department reported Thursday.

Labour costs increased at a 2.7 per cent rate in the fourth quarter after having fallen at a 2.3 per cent rate in the third quarter.

The drop in productivity and rise in labour costs reflected the fact that the growth in overall output slowed in the fourth quarter.

Economists say quarterly changes in productivity and labour costs can swing sharply. They believe labour costs are still rising at slow levels that do not present a threat of higher inflation.

Last week, the government reported that the overall economy, as measured by the gross domestic product, grew at an annual rate of 2.6 per cent in the October-December quarter, a sharp deceleration from a 5 per cent growth rate in the July-September period. With less output in the fourth quarter, productivity weakened.

Since the recession ended in mid-2009, labour costs have been contained as millions of people who lost their jobs during the downturn have struggled to find new employment. The unemployment rate fell in December to 5.6 per cent, the lowest level since 2008.

With the labour market tightening, economists are starting to watch for signs of rising wage pressures. But with labour costs running at such a slow pace, they say it should be some time before that occurs.

For all of 2014, labour costs rose just 1.5 per cent. That was up from a 0.2 per cent gain in 2013 but still well within the range economists view as a modest increase for labour costs.

Productivity rose 0.8 per cent for all of 2014, little changed from the modest 0.9 per cent productivity gain seen in 2013.

The Federal Reserve keeps a close watch on productivity and labour costs for signs that inflation is nearing unwanted levels.

At the moment, the Fed is hoping that wages will start rising at a stronger pace to help Americans catch up from a prolonged period when wage growth has been very weak.

For the past three years, inflation has been rising at rates well below the Fed's target of 2 per cent annual price increases. In recent months, price gains have fallen further amid a big drop in oil prices and a stronger dollar that is making foreign-made goods cheaper for U.S. consumers.