Key Points

  • Data released by the U.S. Bureau of Labor Statistics (BLS) on Thursday showed that third-quarter labor productivity accelerated to its fastest pace in two years, indicating that efficiency gains at U.S. companies may ease wage pressures and help push inflation back toward the Federal Reserve's 2% target.
  • Nonfarm business sector productivity grew at an annualized rate of 4.9% in the third quarter, up from 4.1% in the second quarter. Output rose 5.4% during the period, while hours worked increased only slightly by 0.5%. Unit labor costs fell 1.9% in the third quarter.
  • Joe Brusuelas, chief U.S. economist at RSM, noted in a report that the average 4.5% productivity growth from April to September is "unambiguously good news." He said that if future data show companies using labor and capital more efficiently in investments such as artificial intelligence, the Federal Reserve will have more room to cut interest rates.

Deeper Analysis

After U.S. companies showed signs of streamlining operations, Federal Reserve officials last month raised their economic growth forecast for this year to 2.3%, up from 1.8% at the September meeting, according to their latest median projections.

Fed Chair Jerome Powell, speaking at a press conference on December 10 about the upward revision to GDP, said: "This clearly implies higher productivity." He added that "part of it may come from artificial intelligence," noting that sustained consumer spending and corporate investment in AI are driving growth.

According to analysis by JPMorgan Wealth Management, annual capital investment spending by major U.S. technology companies could more than triple this year to over $500 billion, up from $150 billion in 2023. Combined spending by Alphabet, Amazon, Meta, Microsoft, Oracle, and Nvidia accounts for nearly 25% of total capital spending in the U.S. market.

However, economists believe it may still be too early to assert that artificial intelligence is boosting productivity.

Brusuelas said the favorable productivity data released Thursday "will need to withstand future benchmark revisions to employment and growth data, but for now, it is worth celebrating."

Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, warned in a report Thursday that the Trump administration's trade and immigration policies could undermine any productivity gains.

"Most of the productivity boost from AI still lies ahead, but it will be at least partially offset by the slow drag from current government policies," Tombs said.

"Tariffs will lead to suboptimal resource allocation over time, and stricter restrictions on immigration will limit the talent pool available to rapidly growing companies," Tombs said. He expects annual productivity growth to remain around 2% in the coming years.

Meanwhile, he believes the decline in unit labor costs in the third quarter is "certainly good news for the inflation outlook."

Tombs noted that falling labor costs support the view that the Fed's preferred inflation gauge—the personal consumption expenditures (PCE) price index excluding volatile food and energy prices—will slow to near 2% by the end of 2026.