Nov 3, 2023 - Economy & Business

U.S. economy is showing some productivity pep

U.S. productivity growth
Data: FactSet, Bureau of Labor Statistics; Chart: Axios Visuals

There are hopeful signs that the U.S. is adjusting to the high-wage, high-interest-rate economy that's become a post-pandemic reality.

Driving the news: Fresh data Thursday showed U.S. labor productivity growth jumped by a 4.7% annualized rate in the third quarter. That's the fastest — outside a recession when productivity typically spikes — since 2003.

  • It was the second-straight hefty increase in productivity growth, following a 3.6% rise in the second quarter.

Why it matters: Increasing productivity is the key to establishing a virtuous cycle of growth in the face of tight labor markets, inflation, and high-interest rates.

Be smart: Productivity is measured in output — that is, GDP — per hour worked. So, this big productivity number is kind of another way of saying the third quarter GDP surge we just saw came without a parallel surge in hours worked.

Yes, but: Some economists seem skeptical that the recent uptick in productivity will last.

  • If it does, it's hard to overstate what an important shift this would be for the U.S. economy, where productivity has languished for decades.

The big picture: Productivity growth is the secret sauce that keeps an economy from becoming a never-ending tug of war between workers, business owners and consumers over who benefits from growth.

  • That's because when productivity goes up, the economic pie gets larger, so workers and owners both get bigger slices at the same time.
  • Consumers benefit as well because productivity gains help hold down price increases, improving standards of living.

What they're saying: It makes sense that the rapid growth in wages seen in recent years would lead to the productivity increases we are now seeing.

  • "When labor markets are tight with strong wage growth, it is more difficult to find and thus more expensive to hire workers," wrote economists with Deutsche Bank in a note published on Thursday.
  • "In that environment, firms are incentivized to substitute more capital for labor in the production process, as well as to use existing inputs in a more efficient way, leading to productivity gains over time," the bank adds.

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