The soft job market has a silver lining: Productivity is up, and that helps the economy grow

We got some confirmation that the economy grew at a pretty solid pace in the second quarter. Thursday morning’s gross domestic product report from the Bureau of Economic Analysis was pretty much all good news: The PCE price index, which is the Federal Reserve’s preferred measure of inflation, stayed exactly where it was the quarter before at 2.5%. Disposable income is up, corporate profits are up. It’s a rosy picture of an economy with one worrisome dark spot: A cooling job market.

But, despite that cooling job market, GDP increased 3% — almost double the growth in the previous quarter. And that means, by definition, American workers are getting more productive.

Let’s unpack that definition of productivity. It’s really a ratio of how much stuff we make and do, compared to how much time we spend making and doing it.

In other words, it’s a measure of efficiency.

“The more we can produce for a given hour of work, the better off we are,” said George Pearkes, macro strategist with Bespoke Investment Group.

He said a more productive economy can make more stuff in the same amount of time, or it can produce the same amount faster.

“Either way, changes in labor productivity are overwhelmingly what drives economic growth in the long term,” Pearkes said.

Right now, productivity is being boosted on both sides of the ratio. The economy is continuing to grow and the amount of hours people are working has been coming down.

Skanda Amarnath, executive director of the research group Employ America, said that’s partly because of the kinds of jobs that are being created right now.

“They’re probably in sectors where it’s maybe a little more common to have part-time work, or a more constrained number of hours per job, and so the average workweek has gone down,” he said.

Those sectors include health care and leisure and hospitality, Amarnath said.

As the broader labor market has started to loosen up, “these sectors are the ones kind of picking up some of the slack,” he said. “They’re the ones hiring a little bit more easily, as other sectors may have backed away a bit.”

Meanwhile, those other sectors are relying on workers they hired back when job growth was booming. And after you work a job for a few years, you probably get better at it.

“I think we’re probably seeing some of the dividends of that aggressive hiring, and people who are now in positions where they’re more experienced, they’re better trained, you don’t need to go add another worker to get more from the same person,” Amarnath said.

There’s another factor that could keep boosting productivity, especially now that interest rates are starting to come down: business investment.

George Pearkes at Bespoke Investment Group said right now, there’s already a lot of investment in advanced manufacturing. Think: electric vehicle batteries, solar panels and semiconductors.

In other words, valuable products that don’t require a lot of labor.

“If you’re producing a lot of stuff, and it doesn’t require a ton more hours to do that, that’s going to mean everybody is better off ultimately. Because there’s more income flowing around, it means that we have a higher standard of living,” Pearkes said.

That means workers have more money to spend. Pearkes said that’s how the economy keeps growing in the long run.