What is Productivity and Costs?

Productivity and costs refer to an economic data set that measures future inflationary trends with two indicators. Productivity is the indicator that measures labor efficiency in producing goods and services in the U.S. economy. Costs is the indicator that measures the unit labor costs of producing each unit of output in the U.S. economy. Together, productivity and costs monitors inflationary trends in wages, which usually affect trends of inflation in other areas.

Understanding Productivity And Costs

Both the bond and equity markets seem to be affected in the same direction by productivity data. Because a more efficient workforce can lead to higher corporate profits, equity markets enjoy seeing good productivity growth. The bond markets, which benefit from a low inflationary situation, also prefer to see high productivity due to its role in keeping inflationary pressures down. As productivity growth occurs, inflation is stemmed because the economy can sustain higher growth than could be possible with inefficiencies in the labor markets.

The Productivity and Costs Report

The Productivity and Costs Report is released quarterly by the Bureau of Labor Statistics (BLS). It measures output achieved by businesses per unit of labor. In this context, output is measured by using previously-released gross domestic product (GDP) figures; input is measured in hours worked and the associated costs of that labor. The unit labor costs that are provided take into account more detail than is provided in the earlier labor reports, including the effects of employee benefit plans, stock options expensing and taxes.

Changes in percentage, presented in annualized rates, are the key figures released with this report. Separate productivity rates are released for the business sector, non-farm business sector and manufacturing. Manufacturing is kept separate because, unlike the rest of the data, total volume output is used instead of GDP figures. Moreover, manufacturing also shows the highest volatility of any of the industry groups.

Productivity figures are provided across the economy as a whole, as well as for major industry groups and sub-sectors—it is a very thorough and detailed release, which is the main reason for the long time lag between period end and data release. The BLS will begin with total GDP figures, then remove government production and non-profit contributions to arrive at a GDP component that represents just "corporate America."

Importance of the Productivity and Costs Report

Strong productivity gains have been one of the main reasons that the U.S. economy has expanded for the past 25 years. Productivity gains have historically led to gains in real income, lower inflation and increased corporate profitability. A company that is increasing output with the same number of hours worked will likely be more profitable, which means that it can raise wages without passing that cost on to customers. This, in turn, keeps inflation pressures down while adding to GDP growth.