United States work productivity experienced a dramatic boost in the second quarter of 2009, with some economists proclaiming an end in sight for the recession. But does working harder really translate into a stronger economy?

Increased productivity means a greater number of goods and services are being generated, and as a result the economy is on an upward trajectory. However, economic health relies on more than just productivity. With high unemployment, reduced demand and fewer working hours, Americans may only be performing better relative to other forms of financial decline.

According to newly released data from the U.S. Department of Labor, individual productivity as measured by output per hour for all workers rose by 6.4 percent among nonfarm businesses in the second quarter of 2009. This was the largest gain in productivity since the third quarter of 2003 and greatly surpassed the 0.3 percent growth during the first quarter of the year.

In manufacturing, overall worker productivity rose 5.3 percent from the first quarter, with a 3.9 percent increase in the durable goods sector and 2 percent in the nondurable goods industry. These quarter-over-quarter gains have led some analysts to forecast a more optimistic trajectory for economic recovery.

“These are spectacular numbers and help explain why so many recently reporting companies have beaten earnings estimates,” according to Ian Shepherdson, chief U.S. economist at High Frequency Economics. (Source: MarketWatch)

The Washington Post reports that declining unit labor costs may result in less pressure on inflation and, as an analyst at JP Morgan Chase claims, “rising productivity and widening profit margins are consistent with the end of the recession.”

“The higher worker output and lower labor costs have been good news for companies struggling through the worst recession since World War II. So far, some 70 percent of companies in the S&P 500 have turned in better-than-expected profits for the latest quarter,” MSNBC reports.

However, productivity depends on several other economic factors, the decline of which may give it an artificial boost.

The Department of Labor attributes much of the gain in nonfarm business and manufacturing productivity to the number of hours worked declining faster than output; nonfarm business work hours fell by 7.6 percent and manufacturing hours by 14.4 percent in the second quarter.

Having productivity rise is a positive sign in most circumstances, often signaling improvement in income per capita. Ideally, this rise comes from output growing faster than hours worked rather than hours worked plummeting faster than declining output.

“When productivity rises due to falling hours rather than rising output, it can lead to greater disparities of income in the country. The people who are out of work get less income, while businesses remain profitable,” economic blog Seeking Alpha explains.

Lowered income can hinder consumer spending and ultimately hurt demand. As the Los Angeles Times points out, hourly compensation technically rose by 0.2 percent in the second quarter after falling 2.4 percent in the first, but due to increased gas prices, real hourly compensation actually fell by roughly 1.1 percent.

During the early stages of a recession, corporations struggle to deal with falling demand and their productivity typically declines. However, once expenses have been cut and layoffs implemented, the slowdown in dropping demand can lead to improved productivity. If these gains are not sustainable, though, they likely will not yield a long-term advantage.

“Over the past decade the increasing share of income going to those at the very top of the income distribution has meant that the bulk of American workers haven’t seen much of any benefit from their increasing productivity,” TIME magazine’s The Curious Capitalist blog claims.

The 5.8 percent drop in unit labor costs that may help keep inflation in check and enable the Federal Reserve to maintain low interest rates may be offset by broad declines in output, while the second quarter improvement in corporate profits comes on the heels of massive layoffs over the past year.

Finally, it is important to remember that while productivity is on the rise, Americans’ actual working hours continue to shrink. “If not for the last two miserable quarters, this quarter’s drop in hours would be the steepest in the [Bureau of Labor Statistics] data — back to 1947,” NPR.org makes clear.

Resources

Productivity and Costs, Second Quarter 2009, Preliminary
U.S. Department of Labor, Aug. 11, 2009

Productivity Rises 6.4 %, Fastest Rate in Six Years
by Rex Nutting
MarketWatch, Aug. 11, 2009

Stocks Fall as Investors Await Policy News
by Emma L. Carew
Washington Post, Aug. 11, 2009

Americans Working Much Harder — for Less Pay
by John W. Schoen
MSNBC, Aug. 11, 2009

Mixed Productivity Report: Output Surges, But Work Hours Fall
Seeking Alpha, Aug. 12, 2009

U.S. Worker Productivity Surges in Second Quarter
by Annys Shin
Los Angeles Times, Aug. 12, 2009

Good News! Corporations are Wringing More out of Us Workers!
by Justin Fox
The Curious Capitalist (TIME), Aug. 11, 2009

Layoffs Lead To Soaring Productivity. Hours Worked In Record-Low Range
by Laura Conaway
NPR.org, Aug. 11, 2009