| Consensus | Consensus Range | Actual | Previous | Revised | |
|---|---|---|---|---|---|
| Nonfarm Productivity - Annual Rate | 1.3% | 0.8% to 3.5% | 3.7% | -2.1% | -1.2% |
| Unit Labor Costs - Annual Rate | 2.6% | 0.5% to 3.5% | 1.6% | 4.2% | 3.3% |
Highlights
Nonfarm labor productivity recovered 3.7 percent at an annualized rate in the preliminary report for the second quarter 2023, above Econoday's consensus of 1.3 percent. Unit labor costs were up 1.6 percent, one percentage point below expectations, marking a slowdown from 3.3 percent in the first quarter (revised down from 4.2 percent).
Output increased 2.4 percent in the second quarter after a 1.4 percent expansion in the previous quarter, while hours worked fell 1.3 percent, driving productivity up. The decline in hours worked was the first since the second quarter of 2020.
A 5.5 percent increase in hourly compensation contributed to a further advance in labor costs in the second quarter.
Output increased 2.4 percent in the second quarter after a 1.4 percent expansion in the previous quarter, while hours worked fell 1.3 percent, driving productivity up. The decline in hours worked was the first since the second quarter of 2020.
A 5.5 percent increase in hourly compensation contributed to a further advance in labor costs in the second quarter.
Market Consensus Before Announcement
Nonfarm productivity is expected to rise at a 1.3 percent annualized rate in the second quarter versus 2.1 percent contraction in the first quarter. Unit labor costs, which rose 4.2 percent in the first quarter, are expected to rise to a 2.6 percent rate in the second quarter.
Definition
Productivity measures the growth of labor efficiency in producing the economy's goods and services. Unit labor costs reflect the labor costs of producing each unit of output. Both are followed as indicators of future inflationary trends.
Description
Productivity growth is critical because it allows for higher wages and faster economic growth without inflationary consequences. In periods of robust economic growth, productivity ensures that inflation will remain well behaved despite tight labor markets. Productivity growth is also a key factor in helping to increase the overall wealth of an economy since real wage gains can be made when workers are more productive per hour.
Productivity and labor cost trends have varied over the decades. In the late 1990s, some economists asserted that dramatic productivity advances (based on new technologies) were then allowing the economy to sustain a much faster pace of growth than previously thought possible. Initially, some Fed officials expressed skepticism but later decided that productivity gains had helped boost economic growth and potential GDP growth during the 1990s. That is, the economy could grow faster than previously believed without igniting inflation.
Determining the source of productivity gains has become trickier over the last decade as new technology continues to be incorporated into production - not just in the U.S. but overseas also. Similarly, retraining U.S. workers has been sporadic. Not just low skill jobs are outsourced but now many highly skilled jobs such as programming and accounting are as well. Nonetheless, highly skilled professional jobs have been increasingly difficult to fill during times of high demand. Despite the cross currents in labor market trends, long-term productivity gains are important for maintaining growth in labor income and keeping inflation low.
But in the short-term, output and hours worked can shift sharply just due to cyclical swings in the economy. During the onset of recession, output typically falls before hours worked. This can result in a temporary drop in productivity and a spike in unit labor costs. So, while long-term productivity determines the"speed limit" for long-term growth, one should not be misled by short-term cyclical gyrations in productivity numbers as reflecting the true, underlying trend.
Productivity and labor cost trends have varied over the decades. In the late 1990s, some economists asserted that dramatic productivity advances (based on new technologies) were then allowing the economy to sustain a much faster pace of growth than previously thought possible. Initially, some Fed officials expressed skepticism but later decided that productivity gains had helped boost economic growth and potential GDP growth during the 1990s. That is, the economy could grow faster than previously believed without igniting inflation.
Determining the source of productivity gains has become trickier over the last decade as new technology continues to be incorporated into production - not just in the U.S. but overseas also. Similarly, retraining U.S. workers has been sporadic. Not just low skill jobs are outsourced but now many highly skilled jobs such as programming and accounting are as well. Nonetheless, highly skilled professional jobs have been increasingly difficult to fill during times of high demand. Despite the cross currents in labor market trends, long-term productivity gains are important for maintaining growth in labor income and keeping inflation low.
But in the short-term, output and hours worked can shift sharply just due to cyclical swings in the economy. During the onset of recession, output typically falls before hours worked. This can result in a temporary drop in productivity and a spike in unit labor costs. So, while long-term productivity determines the"speed limit" for long-term growth, one should not be misled by short-term cyclical gyrations in productivity numbers as reflecting the true, underlying trend.
