Nonfarm productivity was revised up slightly to show a 1.5 percent growth rate in the fourth quarter, slightly better than an unrevised 1.2 percent figure anticipated in the Econoday consensus forecast.

Unit labor costs came in at 2.2 percent in the fourth quarter, below the 3.0 percent figure previously reported, and below the 3.0 percent expected in the consensus.

For productivity, the 1.5 percent figure reflected a 2.4 percent rise in output and a 0.8 percent increase in hours worked in Q4. Productivity gained 2.0 percent from the year ago quarter. For all of 2024 versus 2023, annual average productivity was revised up 0.4 percentage point to an increase of 2.7 percent. That is an impressive figure that goes a long way to show why the US economy has outperformed other advanced industrial nations.

For Q4, unit labor costs reflected a 3.8 percent rise in hourly compensation and a 1.5 percent gain in productivity. Unit labor costs are up a modest 2.0 percent over the last four quarters.

Strong productivity growth for 2024 and muted increases in unit labor costs. These are the kind of figures to warm a central banker's heart.

No revision is expected with annual growth in productivity at 1.2 percent and unit labor costs at 3.0 percent in the latest update for Q4.

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.