The Bureau of Labor Statistics publishes the quarterly report of productivity and costs using output data from the Bureau of Economic Analysis and the Census Bureau, labor cost data from the Bureau of Labor Statistics and the BEA, and additional data from the Federal Reserve Board. The report provides detailed information on labor costs and usage across different sectors of the United States economy.
Productivity growth is critical because it allows for higher wages and faster economic growth without inflationary consequences. In periods of robust economic growth, productivity ensures that inflation will remain well behaved despite tight labor markets. Productivity growth is also a key factor in helping to increase the overall wealth of an economy since real wage gains can be made when workers are more productive per hour.
According to the BLS, nonfarm business sector labor productivity increased at a 2.3 percent annual rate during the third quarter of 2014. The increase in productivity reflects increases of 4.9 percent in output and 2.5 percent in hours worked. These figures represent the second consecutive quarter with solid productivity growth following a fall of 4.5 percent in the first quarter and suggest (along with other indicators) that the economy is now in a solid growth phase. Productivity in the manufacturing sector continued to grow at a rapid pace in the third quarter (up 2.7 percent), reflecting strong growth in output (output grew 4.0 percent over last year), and overall manufacturing productivity growth on the year is well above both 2012 and 2013. Strong output growth is starting to show up in hiring and finally wage figures, with both hours worked and real compensation up in the third quarter for the first time this year.
Generally speaking the productivity figures reflect the potential for the economy to grow in the future. High productivity suggests that businesses are investing in research, plant and equipment, investments that are necessary for the economy to continue to grow. Sustained productivity growth has not; however, occurred since the end of the recession, and with the business cycle now 6 years into the expansionary phase, the economy is likely peaking. The headwinds against economic growth, job creation and expansion of wage income are all still in place, but they are now being trumped by the overall expansionary nature of the marketplace. Unfortunately, the same mal-investments and structural problems that always lead to recession are likely now present and will soon begin to put new breaks on economic and business growth.
So while the economic indicators are all good and showing the economy running on all cylinders businesses and investors would be well placed to not let the general exuberance lead them astray. Now is a good time to both invest for future opportunities, but also to ensure that defenses are in place to survive the next downturn, which while not right around the corner, is beginning to walk up the street.
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