Revised U.S. nonfarm productivity shows growth at a robust 3.3 percent in the second quarter of 2025 on quarter at an annualized rate compared with a previously reported 2.4 percent. The Econoday consensus called for a slightly revised 2.5 percent.

The latest revision for productivity reflects output now reported at an increase of 4.4 percent and hours worked up 1.1 percent in Q2. That compares with the previous report showing output up 3.7 percent and hours worked up 1.3 percent.

Productivity was unrevised on year to show an increase of 1.3 percent compared to the second quarter of 2024.

Meanwhile, on the inflation front, the rise in unit labor costs was revised to show a smaller increase of 1.0 percent versus 1.6 percent previously reported for Q2, a nice development for inflation worriers. Expectations called for an unrevised 1.6 percent. Unit labor costs are up 2.6 percent over the last four quarters, unrevised from the previous report.

The combination of stronger productivity growth and lower growth in unit wage costs is bound to be a pleasing mix for financial markets and for the Federal Reserve as it contemplates rate cuts. No barrier here to proceeding with the expected 25 basis point cut on Sept. 16-17.

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.