Many of my posts have bemoaned lackluster productivity growth in the U.S. and questioned the reasons for our poor showing given the large investments that have been made in technology. As a reminder, economic growth is equal to the sum of increases in the working population and productivity growth which is defined as increases in output per hour worked. Given that U.S. population is growing at roughly a .5% annual rate, we need productivity growth of 2% or more in order to enjoy satisfactory economic growth. Education and training as well as good health are important contributors to improving worker productivity. However, the primary source is investment in technologies that allow each worker to do more.
The Bureau of Labor Statistics just reported that productivity grew 2.3% for the past year, the largest increase in fourteen years. Hourly compensation increased 4.3%, but increased output reduced unit labor cost increases to 2.7%. Since unit labor costs are a major driver of the inflation rate, moderation to 2.7% suggests that we are inching toward the FED’s inflation goal of 2%. In order to make further progress, we need additional productivity gains and/or moderation in wage increases which seems likely given that there are some signs of softness in the labor market. While productivity growth is somewhat cyclical and volatile, let’s hope that this is the first of many good reports indicating that AI and other technologies are finally paying off!