Productivity Growth: 2.3% or 5.4% Over the Past Year?

Take your pick. That's right, the Bureau of Labor Statistics says it could be either, depending upon the measure used.

On Aug. 9, the Bureau of Labor Statistics (BLS) said that in the second quarter, the most widely followed measure of productivity, output per hour in the nonfarm business sector, grew at a 2.2.% annual rate from the first quarter. Over the past year, productivity increased just 2.3%, down sharply from the 5% yearly pace seen at the end of 2003.

Perhaps, but what's overlooked in the above numbers is the fact that the BLS actually calculates a second broad measure of productivity, one that shows a more robust trend and one that happens to be followed closely by the Fed. This measure covers only the nonfinancial corporate sector, and it shows productivity in the first quarter grew 5.4% from a year ago. (The BLS reports these data with a one-month lag.) That pace is actually faster than the 4.5% yearly clip recorded at the end of 2003.

Why is this important? Well, it's important for two reasons: 1) our economic growth is productivity-based; and 2) it affects hiring expectations and patterns of employers. Employment grew by 207,000 in July. Employers added jobs because they believed they needed them. If we think productivity is not growing fast enough and our labor and energy costs are seen as too high, this motivates employers to look even more at offshore business sources.

Click here to read a very informative Business Week discussion on these situation.