Revised Productivity: No adjustment to Robust Growth in Q3

Revised data show no adjustment to the initial estimate of 4.9% growth in labor productivity during the third quarter (nonfarm business sector). This strong showing reflected a robust advance in output (5.4%) with little increase in labor input (0.5%).

Productivity figures often swing widely from quarter-to-quarter, and thus, quarterly observations should be interpreted cautiously. In this case, though, the strong results continued a pattern of generally firm increases that have been evident since late 2022. In the chart above, the 8-quarter moving average (to smooth volatility) shows stronger results than those seem before the pandemic. Average compound productivity growth from the end of 2022 to the present totaled 2.6%, up considerably from the average of 1.1 percent in the 2013-18 period.

The chart shows a jump in productivity in 2020-21. However, this gain probably reflects emergency measures adopted by businesses to survive during the Covid pandemic rather than genuine gains in efficiency, although lessons might have been learned that added momentum in subsequent quarters.

Productivity is a key factor in an economy’s inflation environment, as healthy efficiency gains allow businesses to absorb labor costs without raising prices. With strong gains in productivity, unit labor costs (labor compensation adjusted for productivity) have settled recently. Indeed, unit labor costs have declined in the past two quarters and the latest reading on the 8-quarter moving average totaled only 1.8%, easily consistent with the Federal Reserve’s inflation target of 2.0%.

The productivity and labor cost data are available in Haver’s USECON database. The Action Economics expectations figures are in the AS1REPNA database.