Most economists expect productivity will slow later this year, a trend that could boost hiring.
The Labor Department said Wednesday that productivity in the second quarter was better than its initial estimate of a 1.6 per cent gain.
The main reason for the increase was the government revised growth in the second quarter to an annual rate of 1.7 per cent, up from an initial estimate of 1.5 per cent.
That led to more output, which boosted productivity. Productivity is the amount of output per hour worked.
Labour costs rose at an annual rate of 1.5 per cent, slightly lower than the 1.7 per cent initially estimated.
Rising productivity can boost corporate profits. It can also slow job creation if it means companies are getting more from their current staff and don't need to add workers.
Still, there are limits to how much companies can squeeze from their staffs. When that happens, productivity slows and company typically must hire more workers to keep pace with demand.
Economists said they expected productivity will slow from the spring pace for the rest of this year and through 2013. Michael Englund, chief economist at Action Economics, said he was looking for productivity growth at a slight 1 per cent or less in 2013.
Peter Newland, senior economist at Barclays, said productivity should slow as companies increase hiring in coming months.
Productivity declined 0.5 per cent in the January-March quarter. One reason productivity improved in the second quarter is hiring slowed to just 75,000 jobs a month from April through June. That's down from an average of 226,000 a month in the first quarter.
U.S. employers added 163,000 jobs in July, the best month of hiring in five months. The unemployment rate edged up to 8.3 per cent. Hiring probably won't accelerate from that level unless growth picks up or productivity slows, economists say.
The government will release the August employment report on Friday. Economists forecast that the economy added 135,000 jobs last month, and the unemployment rate stayed at 8.3 per cent.
The Federal Reserve closely follows changes in productivity and labour costs to make sure that inflation pressures are not getting out of control.
Over the past year, productivity has risen 1.2 per cent. That is far below the 3 per cent average productivity growth turned in during 2009 and 2010. Those gains were a result of massive job layoffs during the recession as companies slashed costs in the face of falling demand.
Economists said higher productivity is typical during and after a recession. Companies tend to shed workers in the face of falling demand and increase output from a smaller work force. Once the economy starts to grow, demand rises and companies eventually must add workers if they want to keep up.Suggest a correction