Productivity, or the hourly output of nonfarm business employees, declined at a 4.6% annual rate in the second quarter after falling at a 7.4% pace in the previous three months, according to data released Tuesday by the Department of Labor.
These are the weakest consecutive readings in data going back to 1947. Year over year, output per hour posted the biggest drop on record.
With the reduction in productivity, unit labor costs increased at a rate of 10.8% in the second quarter compared to the previous three months. The increase from a year earlier was the largest since 1982.
Labor costs are the biggest expense for many companies, so they often adopt new technology and upgrade equipment to make their workers more productive, helping to mitigate the inflationary impact of higher wages.
However, labor costs are outpacing the central bank’s inflation target by nearly five times year on year, suggesting sustained upward pressure on consumer prices and ultimately making it more difficult for the Federal Reserve to combat inflation. inflation.
The unemployment rate has fallen back to 3.5%, its pre-pandemic level – matching a five-decade low – and job openings outnumber the unemployed nearly two to one. Competition for workers has fueled a rise in wages across industries, especially among low-income workers. While hourly compensation rose in the quarter, it fell 4.4% on an inflation-adjusted basis.
But the job market is a bright spot in an otherwise darkening economic landscape. Inflation at multi-decade highs has weighed on consumer spending and prompted aggressive monetary policy action by the Fed to curb it.
While productivity growth rates can be extremely volatile in normal business cycles, the pandemic and subsequent recovery in the last two years have made the numbers even more prone to wide fluctuations. It is likely to take some time to establish the underlying trend in productivity in the wake of the pandemic, but if it has fallen permanently, there could be lasting repercussions for the economy’s long-term well-being.
Nonfarm business output as measured by this report, which accounts for about 75% of gross domestic product, fell 2.1%. The economy, as measured by GDP, shrank for the second straight quarter as high inflation depressed consumer spending and the Fed’s interest rate hikes clogged trade and housing.
Hours worked, the other factor in productivity calculations, rose 2.6%. That was half the pace of the previous quarter.