Productivity Posts Strongest Gain in Six Years

U.S. productivity rose at an annual rate of 6.4 percent in the second quarter of the year, the biggest increase in nearly six years, according to figures released this morning by the Labor Department.

Increases in productivity are commonly one of the first signs that the economy is beginning to emerge from a recession. That's the good news. The bad news is that the increase was due to continued reductions in the labor force, as employers trimmed hours and payrolls, forcing remaining workers to pick up the slack.

Productivity is a measure of the amount of output produced by each worker per hour worked. If a company reduces staff hours while maintaining the same output, its productivity goes up. Similarly, if output increases while hours work remain the same, productivity goes up as well.

Rising productivity is considered a healthy sign for the economy, as it indicates businesses are becoming more efficient and lowering the costs of production, thereby becoming more profitable. Rising productivity also helps keep a lid on inflation, which is a particular concern coming out of the current recession, given the massive amounts of cash the Federal Reserve pumped into the system as a stimulus.

Actual U.S. economic output fell in the second quarter of the year, declining at a 1.7 percent annual rate, while hours worked fell 7.5 percent, resulting in an overall increase in productivity. Labor costs for all nonfarm businesses fell at a 5.8 percent rate, the biggest decrease since 2001.

Average hourly earnings for workers increased slightly, by 0.1 percent, but were offset by a 1.3 percent increase in consumer costs, resulting in a 1.2 percent decline in real hourly compensation (actual wages adjusted for inflation). All figures are seasonally adjusted annual rates.

The manufacturing sector posted a 9.9 percent rate of decline in output in the second quarter, along with a 14.4 percent drop in hours worked, for a 5.3 percent gain in productivity.

By comparison, the second quarter's 6.4 percent increase in productivity exceeds the revised 0.2 percent rate in the first quarter of the year, and the 1.9 percent average for all of 2008 and 1.8 percent in 2007. Productivity gains have typically averaged around 2.5 percent in the years since World War II, marred by a slowdown in gains from the 1970s to mid 1990s.

Increased productivity due to greater use of computer technology is largely credited with allowing the U.S. economy to grow rapidly during the 1990s without setting off inflation, as employers were able to increase their output without needed additional workers.