Small Business Insights: Productivity Accelerates in Second Quarter

By at 15 August, 2018, 10:33 am

Small Business Insider

by Raymond J. Keating-

U.S. nonfarm labor productivity – that is, output per hour calculated by dividing an index of real output by an index of hours worked by all persons – took a welcome and significant step up in the second quarter of this year, according to the latest report from the U.S. Bureau of labor Statistics.

Specifically, productivity rose by an annualized 2.9 percent rate. That was the best productivity performance since the first quarter of 2015, and a big step up from 0.3 percent in the first quarter and -0.3 percent in the fourth quarter 2017.

Productivity growth has been one of the big trouble spots for the economy over the past decade.

A Lost Decade for Productivity  

Consider that during the post-World War II era, nonfarm labor productivity grew at average annual rate of 2.2 percent. However, productivity growth over the past decade has been anemic. For example, from 2011 to 2017, productivity growth averaged a woeful 0.7 percent. If we look at 2010 to 2017, clear of the last recession and covering the current recovery/expansion period, growth averaged only 1.0 percent. And covering the recession and the last decade, from 2008 to 2017, average productivity growth came in at a meager 1.3 percent.

Keep in mind that over the long run, labor productivity determines the earnings of labor. Indeed, the reason that the U.S. has among the highest incomes on the planet is because we have among the most productive workers. In turn, productivity growth is fueled by private sector investment and innovation, as are profits. By the way, here is an important, clear example of the economic fact that workers and business owners are not at odds, but rather have unified interests.

Higher Investment Fueling Growth, Boosting Productivity

Productivity clearly suffered during the recession and throughout much of the subsequent recovery/expansion due to lackluster investment. But, as SBE Council noted in its look at the most recent GDP report, “Business investment continued its strong growth for the sixth consecutive quarter, helping to fuel current and future economic growth.”

And it cannot be ignored that the growth in business investment clearly took a step up when both tax and regulatory policies shifted from an anti-growth position toward a far more pro-growth stance.

Of course, productivity numbers are notoriously volatile from quarter to quarter. But expectations for stronger productivity growth going forward due to the strong business investment data are well grounded.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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