Earlier this month the Bureau of Labor Statistics (BLS)
announced that productivity had grown at an annual rate of 0.9
percent during the second quarter. An increase in productivity
might sound good on the surface, but this report actually carried
some sobering warning signs.
The second quarter's 0.9 percent annual rate of productivity
growth is a fall-off from 2012's rate of 1.5 percent, and from the
average of 2.1 percent over the last four calendar years.
What's even more disturbing is that in the latest BLS report,
the estimated rate of productivity growth during the first quarter
of this year was revised downward from a positive 0.5 percent to a
negative 1.7 percent. This was the result of downward revisions in
the original estimates of both output and hours worked, with the
drop in the estimate of output being the greater of the two. The
result is that output actually declined in the first quarter,
suggesting that the economy is slowing and getting less efficient
as a result.
The significance of productivity
Productivity is a measure of the economy's efficiency. It
captures the amount of output a workforce creates per hour worked,
so any time output grows faster than the amount of time worked, it
means the economy is becoming more efficient. The real significance
of productivity is that it has implications for both economic
growth and inflation.
Productivity tends to grow when economic growth is accelerating.
When demand increases, businesses are pushed to operate at closer
to full capacity, and growth in output usually happens faster than
increases to the workforce. These things result in strong
On the other hand, when productivity gains slow, it can be a
sign that underlying demand has slowed unexpectedly, signaling
trouble for economic growth. Looking back, a sudden drop in
productivity in 2006 might have been a warning sign of the coming
recession. Productivity gains averaged a very healthy 3.1 percent
in the 10 years through 2005, but then dropped to 0.7 percent in
Productivity also has an influence on inflation trends. If
output is rising faster than the hours worked, it indicates that
efficiency is growing and this efficiency helps moderate price
increases. Productivity growth can be a key to achieving strong
economic growth without high inflation.
Implications for the economy and savings
With productivity growth estimated at -1.7 percent for the first
quarter and 0.9 percent for the first quarter, so far 2013 is on
track for a net loss in productivity for the year. This could mean
a bad year for growth, yet with some inflation pressure despite the
That environment is the worst of both worlds for
. Low growth means little hope of higher interest rates, while
inflation means savings accounts would lose ground to rising prices
at a faster rate. In sum, you can add productivity to the warning
lights that have begun to flash recently on the economic