US productivity surged in the second quarter, surpassing forecasts and moderating the growth of labor costs. This improvement points to easing inflationary pressures and provides crucial data for the Federal Reserve’s policy decisions.
Productivity Boosts Economic Outlook
In the second quarter, US worker productivity increased at a 2.3% annualised rate. This uptick followed a modest rise in the first quarter, according to the latest data from the Bureau of Labor Statistics (BLS).
Key Figures:
- Productivity Increase: 2.3% annualised rate
- Previous Quarter: Slight rise in productivity
- Year-over-Year Productivity Growth: 2.7%
The growth in productivity is encouraging as it reflects improved efficiency among businesses, despite ongoing challenges. The output per hour of nonfarm business employees showed significant gains, highlighting companies’ efforts to optimise operations and manage costs effectively.
Labour Costs: A Welcome Slowdown
Unit labour costs, which measure how much a business pays employees to produce one unit of output, rose at a 0.9% rate in Q2. This is a significant slowdown compared to the 3.8% increase seen in the first quarter.
Labour Cost Trends:
- Q2 Unit Labour Cost Growth: 0.9%
- First Quarter Growth: 3.8%
- Annual Increase: 0.5%, the smallest since pre-pandemic
This moderation in labour cost growth is a positive sign for businesses and consumers alike. It indicates that while wages are rising, the pace is slowing, helping to alleviate some inflationary pressures.
Federal Reserve’s Policy Implications
The improved productivity figures and slower labour cost growth provide the Federal Reserve with valuable insights. While the Fed has kept interest rates unchanged at a high level, Chair Jerome Powell suggested that a rate cut could be considered as early as September if the data supports it.
Key Federal Reserve Insights:
- Current Interest Rate: Held steady at a two-decade high
- Potential Rate Cut: Possible in September if data supports it
- Chair Jerome Powell’s Statement: Balancing inflation and labour market stability
Powell indicated that the Fed will assess whether the overall data and evolving economic outlook justify a reduction in policy rates. The recent productivity and labour cost figures will be critical in this evaluation.
Economic Growth and Employment Trends
The BLS data also revealed that output increased by 3.3% in the second quarter, a notable improvement from earlier in the year. This rise in output, combined with increased hours worked, suggests a robust economic environment.
Economic Growth Highlights:
- Output Increase: 3.3% in Q2
- Hours Worked: Increased during the period
- Hourly Compensation Growth: Eased in Q2
However, there was a notable rise in initial applications for unemployment benefits, reaching the highest level in nearly a year. This spike is partly due to seasonal retooling periods in states like Michigan and Missouri, where major car factories undergo annual adjustments.
What Bloomberg Economics Says…
According to Estelle Ou from Bloomberg Economics, trend productivity growth in Q2 rounds to 2%. With compensation growth at 3.7%, the trend-adjusted unit labour cost stands at 1.7%, aligning with the Fed’s price-stability goals.
Bloomberg’s Insights:
- Trend Productivity Growth: 2%
- Compensation Growth: 3.7% in Q2
- Adjusted Unit Labour Cost: 1.7%
These figures underscore the alignment of productivity improvements with broader economic goals, supporting the Fed’s objectives of maintaining price stability.
