*IMAGE EMBARGOED A Boeing employee tests wing parts on a 737 aircraft on line 2 at Boeing's 737 Factory in Renton, Wash., on Thursday, May 30, 2013. photo by Mike Kane for Bloomberg

US innovators claim they have never been busier, but their ideas are persistently failing to transform the country’s economic data.

Labour productivity fell an annual 1.9 per cent in the first three months of the year, while unit labour costs rose sharply, official figures showed on Wednesday. The output per hour figures came as the country’s gross domestic product barely grew during the quarter even as it added an average of nearly 200,000 jobs a month.

The numbers confirm a longer-run trend of slowing productivity that is alarming policy makers and complicating Federal Reserve decision-making. “It has slowed in quite a worrying way,” said Torsten Slok, chief international economist at Deutsche Bank.

Productivity, which measures how efficiently inputs such as labour and capital are used, evolves over years and decades. This means a single quarter’s data should not be over-interpreted — especially one that was hit by one-time factors including freezing temperatures. The first quarter dive mirrors a weather-affected first quarter in 2014.

But the numbers, which follow a 2.1 per cent annual productivity drop in the fourth quarter, confirm a broader tendency that has been mirrored in a number of advanced economies and has perplexed economists.

Analysis from the San Francisco Federal Reserve shows there was a surge in US productivity between 1995 and 2003, driven by the IT boom, with growth doubling from the annualised average of 1.5 per cent set in the 1970s, 1980s and early 1990s.

The picture then reversed, however, and the US has been stuck in a lower-productivity growth trend since. Internationally comparable figures from the Conference Board show a broader slowdown among advanced economies including the UK and Japan over recent decades.

Some economists say these weak numbers are jarring given the inventiveness being displayed in sectors such as software, medicine, and advanced manufacturing, and the rapid advance of robotics. “People are saying the pace of innovation has never been higher,” says Martin Neil Baily, an economist at Brookings, the think-tank.

Boeing, the aerospace giant, is for example boosting the use of computer automation in its Washington factory making 737-series aircraft, which will help raise output from 42 planes a month to 52 a month in 2018.

“The time between innovative breakthroughs is continuing to diminish,” said Marty Chamberlain, Boeing’s manufacturing operations deputy leader, in an interview. “We are in a highly accelerated part of the curve.”

Explanations for the weak productivity data vary widely. The San Francisco Fed argues it cannot be blamed on temporary damage inflicted by the recession of 2007-09 because the productivity slowdown predated it. Its economists argue it was instead linked to the end of the IT boom of the 1990s.

Among technology pessimists, Robert Gordon of Northwestern University has argued that we are no longer seeing world-transforming innovations similar to the use of electricity, modern transport and telephones, which will bear down on productivity in the longer term.

Mr Baily argues that the output from tech hubs such as the San Francisco Bay may not be well captured by the official statistics. In addition, companies may be taking on more low-productivity, low-wage workers rather than committing themselves to big new investments.

There may well be a “revolution” going on in advanced manufacturing technologies, he adds, but this is now a relatively small share of the economy at 12 per cent of GDP.

The economist Andrew Smithers singles out a longer-term decline in investment as a share of GDP as a critical drag, as well as a slowdown in education improvements in recent decades. A report by the Aspen Institute and MAPI Foundation on Wednesday warned of a “significant lag in capital investment” in the US and argued this was a major contributor to low productivity growth. Whereas real GDP was in 2014 some 8.7 per cent above its level at the end of 2007, gross private domestic investment was up just 3.9 per cent in the same period, it said.

Productivity in the US rose just 0.6 per cent from a year earlier, according to the figures on Wednesday. San Francisco researchers John Fernald and Bing Wang warned in a note in February that their “best guess” is the relatively slow pace will continue. The implications from such sluggish productivity data are numerous.

Paul Ashworth of Capital Economics argues weak productivity could reinforce arguments for rate hikes by the Federal Reserve in the second half of the year. “In an environment where productivity is almost stagnant, the Fed needs to be very wary of letting wage growth accelerate,” he said.

More broadly the efficient use of capital and labour is key to improving living standards, at a time when advanced economies face lower potential growth because of ageing populations. If the US cannot turn round its poor productivity performance, its low-growth malaise will persist for years to come.

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