The preliminary reading for nonfarm business sector labor productivity in the first quarter 2024 is up 0.3 percent from the prior quarter. The change is below the consensus of up 0.9 percent in the Econoday survey of forecasters. Compared to a year ago, nonfarm business productivity is up 2.9 percent. The modest quarter-over-quarter rise in nonfarm business productivity is the slowest since down 0.3 percent in the first quarter 2023. Nonfarm business productivity reflects a 1.3 percent rise for output and a 1.0 percent increase in hours worked. The increase in output is the slowest since down 1.1 percent in the second quarter 2022. Hours worked are higher than the up 0.2 percent in the fourth quarter 2023, but just below the up 1.1 percent in the third quarter 20223.

Nonfarm unit labor costs are up 4.7 percent in the first quarter 2024 compared to the fourth quarter 2024. This is above the consensus of up 3.3 percent in the Econoday survey. Nonfarm unit labor costs are up 2.4 percent compared to a year ago. The quarter-over-quarter increase is the largest since up 7.1 percent in the first quarter 2023. Increases in compensation costs are normal in January and tend to elevate labor costs for the first quarter.

Nonfarm productivity is expected to rise at a 0.9 percent annualized rate in the first quarter and down from 3.2 percent growth in the fourth quarter. Unit labor costs, which rose 0.4 percent in the fourth quarter, are expected to rise to a 3.3 percent rate in the first quarter.

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.