The Productivity of American Workers and Companies Rebounds in the Second Quarter

The productivity of American workers and companies rebounded in the second quarter and grew at a 3.7% annual pace. However, this improvement was partly due to a decline in the number of hours employees worked, indicating some slack in the economy.

Productivity recovered from a revised 1.3% decline in the first three months of the year. The first-quarter drop was not as steep as initially reported.

Over the past four quarters, productivity rose at a 1.3% clip, marking the first positive reading in more than two years.

Key Details

The amount of goods and services produced, known as output, increased at a 2.4% annual rate from April to June.

Hours worked fell at a 1.3% annual rate.

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 goods and services, such as 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. This may indicate that businesses are gaining control over material and labor costs, potentially leading to lower U.S. inflation.

Hourly Compensation on the Rise

Hourly compensation, which includes wages and benefits, has seen a 2.7% annualized increase after adjusting for inflation. This recent development marks a positive shift, as worker pay is now growing at a faster rate compared to inflation.

The Importance of Productivity

Productivity growth is a key indicator of a thriving economy. When businesses become more efficient at their operations, they can generate higher profits and are able to provide better compensation for their workers. Conversely, a prolonged decline in productivity is cause for concern.

Challenges in Measuring Productivity

Measuring productivity accurately in the U.S. economy presents challenges, particularly in an economy largely driven by service sectors such as retail and healthcare. These difficulties have been amplified during the pandemic era, resulting in significant fluctuations in productivity since 2020. However, the overall trend has shown a decline in productivity over the long term.

Market Outlook

Despite the positive news on productivity, market reactions tend to be minimal when these reports are released. As such, the Dow Jones Industrial Average (DJIA), X, and S&P 500 (SPX) may experience lower openings in Thursday's trades.