The numbers: The productivity of American workers and companies rebounded in the second quarter and grew at a 3.7% annual pace, but it wasn’t all good news. The improvement stemmed in part from the first decline since 2020 in the number of hours employees worked, a sign of more slack in the economy.
Productivity recovered from a revised 1.3% decline in the first three months of the year, the government said Thursday. The first-quarter drop was not as steep as initially reported, however.
Over the past four quarters, productivity rose at a 1.3% clip, the first positive reading in more than two years.
More important, the cost of production slowed and pointed to easing inflation in the U.S. economy.
Key details: The amount of goods and services produced, known as output, increased at a 2.4% annual rate in three months running from April to June.
Hours worked fell at a 1.3% annual rate, largely because of cutbacks at manufacturers. Factories have scaled back production of goods because of weaker demand for big-ticket items.
Productivity is determined by the difference between output and hours worked.
Unit-labor costs rose in the second quarter at a mild 1.6% annual pace.
Unit-labor costs reflect how much a business pays an employee to produce a certain number of goods and services, say a box of chocolates or the number of cleanings at a dental office.
The increase in unit-labor costs over the past year also slowed to 2.4%, marking the lowest level since 2021. That might be a sign businesses are getting material and labor costs under control, an outcome that could lead to lower U.S. inflation.
Hourly compensation, or the amount of wages and benefits paid to employees, climbed at a 2.7% annual rate after adjusting for inflation.
Only recently has worker pay begun to rise faster than inflation.
Big picture: The second-quarter increase in productivity is welcome news, but only if it is part of a sustained uptrend. That remains to be seen.
High productivity is a sign of a very healthy economy. Businesses can maintain high profits and afford to pay workers more when they get better at their jobs.
Falling productivity is usually a sign of trouble if it persists for extended periods.
The government’s ability to measure productivity, however, is fraught with difficulty in a U.S. economy larger driven by services such as retail and health care.
The pandemic era has made it even more difficult. Productivity has swung wildly up and down since 2020. Still, the long-term trend has been toward weaker productivity.
Looking ahead: “Strong growth in labor productivity continued to push down unit labor costs in the U.S., which should help abate concerns regarding future inflation,” said Eugenio J. Aleman, chief economist at Raymond James.
Market reaction: The Dow Jones Industrial Average
DJIA,
X and S&P 500
SPX,
declined in Thursday trades. Markets rarely react to the productivity report.
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