Productivity falls in second quarter

Nonfarm productivity was lower than expectations falling -0.9% in the second quarter. Over the last four quarters, productivity in this sector has risen 3.9% (a marked slowing from the 6.3% year-over-year increase reported for the first quarter).

BOTTOM LINE

Although quarter-to-quarter movements in productivity are highly erratic, it appears that the post-recession surge in productivity growth that is typical of the recovery phase is beginning to ebb (indeed the pattern appears to be very similar to that observed following the 2001 recession).

From an economist’s perspective, productivity has always been a two-edged sword. On the one hand, faster productivity growth boosts competitiveness and is the source of real wage gains. On the other hand, faster productivity gains raises the bar that real GDP growth must cross in order to generate increases in employment. A slowdown in productivity growth from the torrid rate of 6¼% year-over-year in the first quarter to 4% year-over-year almost exactly follows the pattern of the deceleration in productivity seen in 2002 and we note that the 10-year average of productivity growth is 2½%.

It would not be unreasonable to expect productivity growth to slow to around this rate over the coming quarters. The declines in unit labor costs should improve the competitiveness of the U.S. business sector (especially in manufacturing where unit labor costs fell by around 7% over the last year). There is little to support a deflation thesis, however, since despite falling unit labor costs, the price deflator for nonfarm business output increased 0.9% over the last year (pointing to wider profit margins).

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