A rise in output sharply lifted second-quarter productivity to 2.3 percent annual growth from revised 0.4 percent growth in the first quarter. On the wage side, hourly compensation slowed in the second quarter to help lower unit labor costs to 0.9 percent annual growth from a revised 3.8 percent in the first quarter.

Output rose at a 3.3 percent rate in the second quarter from 1.0 percent in the prior quarter, at the same time that hours worked rose only modestly, to a 1.0 percent rate from 0.6 percent. Hourly compensation slowed to 3.3 from 4.2 percent growth which, when adjusted for inflation, came to a steady 0.4 percent that was unchanged from the first quarter.

These readings are better than expected and reflect synergies tied to the second-quarter jump in GDP, which doubled to 2.8 percent annual growth in data released last week. Rising productivity is a plus for the economic outlook and will help pull forward the Federal Reserve's anticipated rate cut.

Nonfarm productivity is expected to rise at a 1.6 percent annualized rate in the second quarter versus 0.2 percent growth in the first quarter. Unit labor costs, which climbed 4.0 percent in the first quarter, are expected to slow to a 1.9 percent rate in the second 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.