Can Productivity Keep Driving the U.S. Economy?

This week, Craig Siminski, of CMS Retirement Income Planning, shares with us an article discussing the importance of productivity to the U.S. economy, possible contributing factors to the recent surge, and the prospects for an extended period of strong productivity growth:

The productivity of U.S. workers increased by 2.7% in 2023 — well above the average annual rate of 2.1% since the end of World War II, and a dramatic change from 2022, when productivity dropped by 2.0%. It’s also a big improvement over the 0.9% growth rate in 2021.

According to the nonpartisan Congressional Research Service, “Productivity growth is a primary driver of long-term economic growth and improvements in living standards.” On a more immediate level, the productivity surge in 2023 may help explain why the U.S. economy was able to grow at a strong pace while inflation dropped.

Doing More with Less

Broadly, productivity is the ratio of output to inputs. A productivity increase means that output increases faster than inputs, essentially producing more with less.

The most commonly cited productivity measure for the U.S. economy is labor productivity for the nonfarm business sector (the data cited in the first paragraph of this report). In simple terms, this is the value of goods and services produced per hour of labor. The nonfarm business sector comprises most U.S. business activity excluding farms, general government, and nonprofits.

Boosting GDP While Fighting Inflation

The 2.7% increase in 2023 means that, on average, 2.7% more value was created for each hour of labor. This helps boost gross domestic product (GDP), while also helping to control inflation by holding back the wage-price spiral, which can push inflation out of control. In a tight employment market, as we have had for some time, a shortage of workers can force businesses to offer higher wages, which they pass on to consumers as higher prices.

Because consumers are then earning more at their jobs, they demand more goods and services and are willing to pay higher prices, which pushes businesses to…

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 25 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

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