U.S. Productivity Rises, Indicating Continued Boom
Productivity surged in the American workplace during the spring and labor costs dipped, a powerful signal that the record-long U.S. economic expansion still packs plenty of momentum to lift profits and wages. It also provided further evidence that the economy maintains the resilience to grow without kindling inflation.
The Labor Department reported Tuesday that productivity climbed at an annualized rate of 5.3% in the second quarter and is up 5.1% over the last 12 months, the highest yearlong pace in nearly 17 years.
And a drop in unit labor costs over the last 12 months was the first such decline since 1984.
Analysts said the rising productivity, a measure of the economy’s ability to squeeze more output from the work force, appears to reflect a continuing boom in business investment in technology. At the same time, it underscores the ascent of the so-called “new economy,” an economy increasingly reliant on computer networks and innovative software.
“It’s stunning how fast productivity has improved in the past quarter,” said Christian E. Weller, an economist with the Economic Policy Institute in Washington, a liberal think tank.
That productivity growth, combined with other recent evidence of economic expansion, Weller said, “indicate that there’s something to the story that we have finally figured out how to use computers and software to our advantage.”
But at this point in the nation’s economic expansion, productivity appears to be rewarding business owners more handsomely than ordinary workers.
Tuesday’s figures showed that hourly compensation--including wages and benefits increases--climbed at an annual rate of 5.3% during the second quarter and rose 4.7% over the last 12 months.
But the gain in what’s known as real hourly compensation, which filters out the impact of inflation, was up by a skimpier rate of 1.6% for the second quarter and 1.4% for the last year.
Normally in an economic expansion, the growing demand for workers and other resources tends to bid up wages and prices. But gains in productivity--the amount of output per hour of work--enable firms to produce more without adding workers or extending their hours.
In fact, during the last quarter and the last year, business’ labor costs per unit of production actually fell. The decline was 0.1% for the second quarter and 0.4% over the last 12 months.
Thus, for inflation-watchers the productivity report was highly encouraging because increased productivity allows businesses to boost profits or wages without raising prices.
The data were far better than Wall Street had expected. Treasury bond yields, which are especially sensitive to inflation and Federal Reserve policy, declined on the belief that the news is another indication that the Federal Reserve will leave interest rates untouched at its Aug. 22 policy meeting.
The Dow Jones industrial average rallied, climbing 109.88 points to close at 10,976.89. The broader market was mixed, with the Nasdaq composite index down 14.44, closing at 3,848.55.
But over the long term, sluggish wages could translate into trouble for the economy because it undercuts the spending power of the consumer, whose spending accounts for two-thirds of the U.S. economy.
“We need to make sure that productivity gains are going into wage gains so that consumption can be sustained,” Weller said. Higher wage increases, he said, would ensure that “all the new products we’re making with this new productivity are going to be bought by somebody.”
The second-quarter surge in productivity followed a gain of 1.9% in the first three months of the year. Much of the second-quarter improvement came in durable manufacturing, which was up at a 9.6% rate during the second quarter.
But some analysts viewed the latest report skeptically, noting that productivity numbers often are volatile and frequently are revised after follow-up data become available.
One skeptic, economist Dean Baker with the Center for Economic and Policy Research, said the productivity calculation might overstate the impact of the improvement in computer technology.
But Baker said that even if productivity growth proves to be only about half of the annualized level reported Tuesday, it still would have a far-reaching positive impact on the federal budget--significantly delaying the need for funding increases for Social Security, among other things.
Analysts generally consider the rising productivity a remarkable achievement this far into an economic boom that, at more than nine years, is the longest in U.S. history.
Ordinarily, productivity picks up most dramatically when the nation is bouncing back from a recession and starts returning unemployed workers and underused factories to full-tilt production. Then it slackens toward the end of the cycle.
Economists credit the current productivity boom to, in addition to savvier use of technology, innovative work practices. Alec Levenson, a labor economist at the Milken Institute and at USC, said, “Companies are continuing to learn how to use workers to their full potential. In some sense, they don’t have any other choice because it is so difficult to find qualified workers in such a tight labor market.”
The productivity figures, combined with other recent government reports, show the U.S. economy chalking up an enviable array of accomplishments simultaneously. Along with vigorous economic growth, the picture includes unemployment at 4%, near a 30-year low, and modest inflation.
Productivity growth, economists said, is the reason the expansion has continued so long without rekindling inflation--the bugaboo that usually dogs, and ultimately undermines, economic growth.
As recently as the mid-1990s, experts weren’t sure that heavy investment in high technology would pay off enough to justify the costs. After hitting 4.1% in 1992 as the nation emerged from recession, productivity growth fell to 0.1% the following year and was still only 1% in 1995, before turning up in the second half of the decade.
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Business Productivity
Percentage change from previous quarter at annual rate, seasonally adjusted:
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2nd quarter: 5.3%
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Source: Labor Department
