Nonfarm business labor productivity is up 3.2 percent in the fourth quarter 2023, unrevised from the preliminary estimate. The increase is close to the consensus of up 3.1 percent in the Econoday survey of forecasters. Gains in productivity are slower than the up 4.6 percent in the third quarter, faster than the up 2.9 percent in the second quarter, and well above the 0.4 percent decrease in the first quarter. In the fourth quarter 2023, output is up 0.3 percent, hours worked are up 0.3 percent, hourly compensation is up 3.6 percent, and real hourly compensation is up 0.8 percent. Overall productivity gains are being driven by compensation, although hours are on the rise as well.

Nonfarm business labor productivity is up 1.3 percent for 2023 as a whole compared to down 1.9 percent in 2022.

Nonfarm unit labor costs are up 0.4 percent in the fourth quarter 2023, a small downward revision from up 0.5 percent in the preliminary report. The increase in labor costs is below the consensus of up 0.7 percent in the Econoday survey. The unit nonlabor payments are up 2.3 percent and the value-added price deflator is up 1.2 percent. Unit labor costs in the fourth quarter are only slightly higher than the up 0.2 percent in the third quarter. Rapid wage increases have tapered from the first and second quarters of 2023 when unit labor costs were up 6.8 percent and 2.3 percent, respectively.

Unit labor costs are up 2.9 percent for 2023 as a whole compared to up 5.8 percent for 2022.

The second-estimate for fourth-quarter nonfarm productivity is an increase 3.1 percent rise versus 3.2 percent in the first estimate. Unit labor costs, which rose 0.5 percent in the first estimate, are expected to rise 0.7 percent.

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.

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.