The U.S. Bureau of Labor Statistics today reported that nonfarm primary productivity increased 2.3% in the second quarter of 2024, with output rising 3.3% and hours worked increasing 1.0%. (All figures are seasonally adjusted and annualized.) Compared with the same period last year, nonfarm labor productivity increased 2.7%. (See Table A1.)
In the same period, unit labor costs increased 0.9%, reflecting a 3.3% increase in hourly compensation and a 2.3% increase in productivity. Unit labor costs have increased slightly by 0.5% over the past four quarters, the lowest rate of increase since the third quarter of 2019, when they also increased by 0.5%. (See Tables A1 and 2.)
The BLS calculates unit labor costs as the ratio of hourly compensation to labor productivity. An increase in hourly compensation typically increases unit labor costs, while an increase in productivity decreases them. Real hourly compensation, which is adjusted for consumer prices, rose 0.4% in the second quarter of 2024, while remaining flat over the past four quarters.
Labor productivity, or output per hour, is calculated by dividing the real output index by the total hours worked index, which includes employees, owners, and unpaid family workers.
During the current economic cycle, which began in the fourth quarter of 2019, labor productivity has grown at an annual rate of 1.6%, with output growing 2.2% and hours worked 0.7%. Compared to the previous economic cycle, which ran from the fourth quarter of 2007 to the fourth quarter of 2019, the current annual productivity growth rate is slightly higher than the 1.5% rate in that cycle, but lower than the long-term rate of 2.1% since the first quarter of 1947.
Manufacturing productivity increased by 1.8% in the second quarter of 2024
In the second quarter of 2024, labor productivity in the manufacturing sector increased by 1.8%, driven by a 3.4% increase in output and a 1.6% increase in working hours. For the durable manufacturing sector, productivity rose by 0.4%, driven by a 2.3% increase in output and a 1.9% increase in working hours. In contrast, the nondurable manufacturing sector recorded a significant productivity increase of 3.5%, driven by a 4.6% increase in output and a 1.1% increase in working hours. Overall, manufacturing productivity increased 0.4% year-on-year (see Tables A1, 3, 4, and 5).
In terms of unit labor costs, total manufacturing increased 3.2% in the second quarter of 2024, driven by a 5.1% increase in hourly compensation and a 1.8% increase in productivity. On a year-on-year basis, unit labor costs in manufacturing increased 4.3%, with a 4.7% increase in hourly compensation and a slight 0.4% increase in labor productivity. Real hourly compensation also increased 1.5% year-on-year (see Tables A1 and 3).
On a year-on-year basis, labor productivity in manufacturing grew 0.3% during the current business cycle, as output grew 0.2% and hours worked decreased 0.1%. Although the current cycle’s 0.3 percent annual productivity growth rate is better than the 0.0 percent rate in the previous cycle from Q4 2007 to Q4 2019, it is below the long-run average of 2.1 percent since Q1 1987. It should be noted that the concepts, sources, and methods used in the industrial output series differ from those used in the trade and non-agricultural output series, preventing direct comparison between these output measures. For more details, please see the technical notes.
Impacts of non-farm primary productivity on financial markets
Quarterly non-farm primary productivity can have significant impacts on markets, especially if there are noticeable changes in this productivity measure. Here are some ways that changes in non-agricultural primary productivity can affect markets:
- Economic growth: Higher productivity can lead to increased economic output, which in turn can boost overall economic growth. This can have a positive impact on stock markets, as investors may view a growing economy as a good opportunity for businesses to thrive.
- Employment: Increased productivity can lead to increased demand for labor in non-agricultural sectors, which can lead to lower unemployment rates. Lower unemployment rates can boost consumer confidence, leading to increased spending and potentially benefiting the stock market.
- Inflation: If productivity increases significantly, it can lead to lower costs of production. This can help keep inflation under control, which is generally a positive thing for both consumers and investors.
- Interest rates: Central banks may adjust interest rates based on changes in productivity. If productivity increases, central banks may raise interest rates to prevent the economy from overheating. This can affect borrowing costs for businesses and consumers, which in turn affects investment decisions and market performance.
- Sectoral performance: Different sectors of the economy may be affected differently by changes in non-agricultural productivity. For example, technology companies may benefit more from increased productivity because of their reliance on innovation and efficiency, while traditional manufacturing companies may face challenges if they are slower to adapt.
- International trade: Changes in productivity can affect a country’s ability to compete in global markets. Higher productivity can lead to lower production costs, making exports more competitive. This can affect trade balances and currency values, which in turn can affect stock market performance.
