Worker productivity surges to fastest pace in years

Recession or expansion, there's one constant in the U.S. economy: Worker productivity continues to increase at an impressive rate.

U.S. second quarter worker productivity surged at an annualized rate of 6.4 percent, with unit labor costs plunging at a 5.8 percent rate, the U.S. Labor Department announced Tuesday, as companies continue to find ways to increase employee output amid challenging business conditions. Economists surveyed by Bloomberg News had expected productivity to increase 5.5 percent in Q2 and unit labor costs to fall 1.8 percent. In Q1, productivity increased 1.6 percent.

Further, the report indicates how corporate earnings are rising. In Q2 output fell 1.7 percent, but hours worked plummeted 7.6 percent, with hourly compensation rising just 0.2 percent. That means companies are getting much more productivity out of existing staff.

Large yearly productivity gains continue

What's more, the report shows continued, long-term productivity gains amid contained costs. Over the past 12 months, productivity rose 1.8 percent while unit labor costs have declined 0.6 percent. That should help keep inflation in check as the U.S. Federal Reserve continues its quantitative easing and low interest rate policies to stimulate the U.S. economy.

However, investors can also continue to see the effects of the nation's pronounced recession in the Q2 data. In the past 12 months, output fell 5.6 percent -- that metric's largest decline since the government began keeping the statistic in 1948 -- and hours worked declined 7.3 percent, also a record.

Economists: strong economies increase productivity

Productivity measures output per hour worked. Economists say rising productivity usually leads to increases in income, as businesses can increase salaries or wages without increasing per unit costs. While quarterly productivity statistics are important, most economists focus on the longer, 12-month trend, as it's more indicative of overall efficiency and output strength.

U.S. productivity averaged about 2.7 percent during the 1948-1970 period, then slumped to 1.6 percent in 1971-1995 period. However, starting in 1995 the technology revolution, driven by the personal computer, microprocessor, and the internet, among other breakthroughs, propelled a large increase in productivity to about 2.5 percent per year. The remarkable productivity rate helped create the record earnings and rising real, median incomes that characterized the 'Roaring 90s,' so says economist Peter Dawson.

Economic Analysis: Once again, it's another impressive quarter for U.S. productivity. The nation's workforce continues to become more efficient, which is a good sign, particularly given other hurdles that businesses face during this pronounced recession (sluggish sales, constrained credit, etc.), as it will keep per unit production costs down. As in Q1, and in 2008 and 2007, in Q2 companies did a very good job increasing productivity while containing employee costs amid sluggish business conditions. Companies are becoming more efficient at controlling cost variables in this recession -- and those factors bode well for earnings growth as the U.S. economy starts to recovery.

However, short-term, increased productivity will reduce the pool of jobs available, and the U.S. economy is already woefully short of jobs. That means new sectors -- new engines of growth -- must become the job-creation machines to lower the nation's unemployment rate.
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