Second-quarter nonfarm productivity is revised up to 2.5 percent annualized growth from 2.3 percent in the first estimate. For comparison, productivity in all of 2023 grew 1.4 percent and fell 1.9 percent in 2022. Unit labor costs in the second quarter are in turn revised lower to a 0.4 percent increase from the first estimate's 0.9 percent. Respective 2023 and 2022 comparisons are increases of 2.8 and 5.7 percent.

Helping productivity and keeping down labor costs in the second quarter is an upward revision to output, now at 3.5 percent annualized growth from an initial 3.3 percent. Hourly compensation is revised lower to a 3.0 percent increase from 3.3 percent; when adjusted for inflation, real hourly compensation edged only 0.1 percent higher in the quarter versus an initial 0.4 percent rise.

Improved productivity and lower labor costs are certain to be at the center of the Federal Reserve's coming debate at the September 17-18 FOMC, a debate that looks to center on the size of the pending rate cut. Today's results will support those calling for an upsized 50-basis-point reduction.

The second-estimate for second-quarter nonfarm productivity is expected to rise 2.4 percent versus 2.3 percent annualized growth in the first estimate. Unit labor costs, which rose 0.9 percent in the first estimate for the second quarter, are expected to be reported up at a 0.8 percent rate in the second estimate.

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.