Third-quarter nonfarm productivity came in at 2.2 percent annualized growth versus a revised 2.1 percent in the second quarter. Unit labor costs in the third quarter were up 1.9 percent, way more than expected, after rising a revised and shocking 2.4 percent in the second quarter. The Econoday consensus forecast looked for productivity to rise 2.5 percent and unit labor costs to be up 1.0 percent.

Those 2Q revisions are particularly unpleasant as unit labor costs were previously reported up only 0.4 percent in the second quarter and productivity was previously reported at 2.5 percent. For Fed officials completing their FOMC meeting today, the latest figures showing slower productivity growth and higher unit costs may prove eye catching, if not enough to alter today's expected 25 basis point cut.

The unfortunate upward revision in 2Q unit labor costs reflects real hourly compensation up 1.7 percent versus 0.1 percent previously reported and output up 3.0 percent versus 3.5 percent previously reported. Hours worked were up 0.9 percent versus 1.0 percent previously reported for 2Q. The revisions reflect the Commerce Department's annual revision of its national accounts series.

The initial release for Q3 is expected to show productivity rose at a 2.5 percent rate in the quarter versus 2.5 percent in Q2. Unit labor costs are seen up at a 1.0 percent rate versus 0.4 percent in Q2.

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.