US productivity surges in second quarter; labor costs growth slows

WASHINGTON (Reuters) – U.S. worker productivity rebounded sharply in the second quarter, helping to curb growth in labor costs and offering another boost to the improving inflation outlook.

Nonfarm productivity, which measures hourly output per worker, increased at a 3.7% annualized rate last quarter, the Labor Department said on Thursday. Data for the first quarter was revised higher to show productivity declining at a 1.2% pace instead of the previously reported 2.1% rate.

Economists polled by Reuters had forecast productivity increasing at a 2.0% rate. Productivity grew at a 1.3% pace from a year ago. That ended five straight quarters that productivity had declined on a year-on-year basis.

Still, productivity remains lackluster. During the current business cycle, starting in the fourth quarter of 2019, labor productivity has grown at a 1.4% rate, far is below the long-term historical average rate since 1947 of 2.1%.

Sluggish productivity is partly the result of employers hoarding workers after experiencing difficulties finding workers during the COVID-19 pandemic. Worker hoarding has contributed to labor market resilience despite the Federal Reserve raising interest rates by 525 basis points since March 2022, to tame inflation.

Unit labor costs – the price of labor per single unit of output – rose at a 1.6% rate in the second quarter. They increased at a 3.3% pace in the prior quarter. Unit labor costs grew at a 2.4% rate from a year ago. The moderation bodes well for bringing inflation down to the Fed’s 2% target.

Data last month showed a significant slowdown in annual inflation rates in June.

Hourly compensation shot up at a 5.5% pace last quarter after rising at a 2.1% rate in the January-March period. It increased at a 3.7% rate from a year ago.

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