The numbers: The productivity of U.S. businesses and their workers rose in the fourth quarter at 2.7% pace compared with a year earlier, possibly a sign the economy could grow faster than expected even as inflation slows.
Productivity advanced 3.3% in the fourth quarter, the government said, after a frothy 4.9% surge in the third quarter.
The recent improvement in productivity is a welcome sign after it declined in 2022.
Higher productivity is the secret sauce for an economy. When it rises, businesses earn bigger profits and workers reap bigger wages. Higher productivity also helps to reduce inflation.
It’s still too soon to say whether the recent trend is sustainable, however. Productivity had been growing slowly for years before the pandemic and had shown little sign of improving.
Some economists contend that new technologies such as artificial intelligence could boost productivity in the years to come.
The big picture: Productivity is hard to measure and it often takes time for new trends to emerge. But the most recent trend looks promising.
Key details: Output — or the amount of goods and services produced — rose at a sharp 3.7% annual rate in the fourth quarter.
The amount of time employees worked increased a mild 0.4%.
Productivity is determined by the difference between output and hours worked.
Rising productivity takes place when workers produce more goods and services per hour — boxes of widgets, for example, or number of restaurant customers served — than the year before.
Unit-labor costs rose a modest 0.5% in the quarter and 2.3% over the past year. That measure reflects how much it costs to make each product.
Unit-labor costs had jumped 5.6% in 2022 as inflation plagued the U.S. economy.
Looking ahead: “As we have been stressing for the past eight months, the revival in productivity is encouraging for the broader inflation and economic outlook,” said chief economist Gregory Daco of EY Parthenon.
“If companies can generate strong productivity growth, they will be able to control costs and protect margins without sacrificing talent in an environment of still-elevated wages and fading pricing power,” he said.
Market reaction: The Dow Jones Industrial Average
DJIA
and S&P 500
SPX,
rose in Thursday trading.
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