U.S. nonfarm productivity shows growth at 2.4 percent in the second quarter of 2025 on quarter at an annualized rate compared with a revised minus 1.8 percent in Q1 (was minus 1.5 percent). Expectations for Q2 centered on a gain of 1.9 percent, so this is good news.

The latest figure reflects output reported at an increase of 3.7 percent and hours worked were up 1.3 percent. Productivity increased 1.3 percent compared to the second quarter of 2024.

Meanwhile, on the inflation front, unit labor costs rise at a 1.6 percent annualized rate in the second quarter compared with a revised 6.9 percent in Q1 (was 6.6 percent) and below the expected increase of 2.1 percent.

Unit labor costs are up 2.6 percent over the last four quarters. For the latest quarter, unit labor costs reflect a 4.0 percent increase in hourly compensation and the 2.4-percent increase in productivity.

These figures suggest a return to trend-like increases in productivity and labor costs after a more concerning Q1. The Federal Reserve will be a lot happier with the relatively low increase in unit labor costs in the latest quarter.

Productivity is seen up 1.9 percent in Q2 at an annual rate versus a decrease of 1.5 percent in Q1. Unit labor costs are seen rising a more trend-like 2.1 percent after 6.6 percent in Q1.

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.