Productivity Gains Add To Case for Rate Cuts

Workers were more efficient in the second quarter, potentially allowing space for wages to continue growing without putting too much upward pressure on inflation.

Labor productivity increased 2.3% in the 2024 second quarter from the prior quarter, Bureau of Labor Statistics data showed, better than the 0.4% increase in the first quarter. Economists surveyed by The Wall Street Journal and Dow Jones Newswires had forecast a more modest increase of 1.8%.

“The firming in productivity growth is notable because it has scope to improve the economy’s potential rate of growth,” wrote Wells Fargo economists Sarah House, Michael Pugliese, and Nicole Cervi.

Labor productivity measures economic output against the number of hours worked. If labor productivity is growing, it usually leads to increased economic growth, since more is produced over the same amount of time.

Productivity measurements are only now getting back in order after pandemic-era hiring trends helped skew the index. The mass layoffs at the onset of the pandemic and subsequent rehirings distorted the data.

Lower Labor Costs Point To Declining Inflation

The report also showed that labor costs slowed to levels not seen in nearly five years—another sign that inflation is trending lower.

Unit labor costs, or what it costs businesses to produce one unit of its product, were higher by 0.9% in the second quarter. Compared with the same period a year ago, labor costs were higher by 0.5%, which is the slowest year-over-year labor cost growth since the 2019 third quarter. 

“This suggests reduced pressure on services inflation ahead, an important step to bring overall inflation back to trend,” wrote Ben Ayers, Nationwide senior economist. 

Wells Fargo economists said the increase in productivity helped lower unit labor costs, which along with the lower readings in the recently-released Employment Cost Index, “adds further evidence that inflation pressures from the labor market are easing.”

The productivity report should provide the Federal Reserve with more data that inflation is moving lower, increasing the likelihood that the central bank would cut interest rates at its September meeting. 

“The acceleration in productivity and corresponding slowing in unit labor costs amid a gradually cooling U.S. labor market support the case for the Fed to reduce interest rates in September,” wrote BMO Senior Economist Jay Hawkins.