Productivity Measurement Analysis series – United States, Q3 2025
by Martin Fleming
| Sector | Quarter-on-year ago comparison, SAAR (Q3 2024) |
Quarter-on-quarter comparison (Q1 2021) |
Pre-COVID-19 comparison, SAAR (Q4 2019) |
| Nonfarm Business | |||
| Labour Productivity | 1.9% | 1.3% | 2.0% |
| Unit Labour Cost | 1.2% | 2.9% | 2.9% |
| Manufacturing | |||
| Labour Productivity | 2.3% | 0.1% | 0.3% |
| Unit Labour Cost | 1.3% | 4.0% | 3.7% |
| Nonfinancial Corporate* | |||
| Labour Productivity | 2.8% | 1.2% | 2.1% |
| Unit Labour Cost | 1.3% | 3.2% | 2.9% |
In the third quarter of 2025, U.S. nonfarm business sector labor productivity increased 4.9% from the prior quarter, as output increased 5.4% and hours worked increased 0.5%, all at seasonally adjusted annualized rates (SAAR). From the same quarter a year ago, nonfarm business sector productivity increased 1.9%. The January 8th Bureau of Labor Statistics (BLS) release was delivered two months late due to the 43-day U.S. government shut down.
The BLS reported a revised 4.1% nonfarm productivity increase in the second quarter as a 5.2% output decline accompanied a 1.0% increase in hours worked. However, over the first half of 2025, nonfarm labor productivity increased at an annual rate of 0.3%. As is well known, U.S. tariff policy shifted in the first half of 2025. Consequently, anticipating the tariff’s implementation, imports increased, which is negative for U.S. GDP accounting. GDP measures domestic production, not sales. The Bureau of Economic Analysis reported a first quarter GDP decline of 0.6% SAAR with a rebound of 3.8% SAAR increase in the second quarter, as imports slowed. The third quarter GDP increase was 4.3%.
Unit labor costs in the nonfarm business sector fell at a 1.9% SAAR increase in the third quarter, reflecting a 2.9% increase in hourly compensation and a 4.9% increase in productivity. Unit labor costs increased 1.2% over the last four quarters.
Manufacturing sector labor productivity rose 3.3% SAAR in the third quarter, as output rose 2.6% and hours worked fell 0.7%, all QoQ at SAAR. Unit labor costs in the manufacturing sector increased 1.5%, reflecting a 4.8% increase in hourly compensation and a 3.3% increase in productivity. Manufacturing unit labor costs increased 1.3% from the same quarter a year ago.
In the third quarter, manufacturing sector productivity was 2.3% above the year ago level with an annual average growth of 0.4% over the 23 quarters since the fourth quarter of 2019 prior to the onset of the COVID-19 pandemic. Over the same 23 quarter period, unit labor costs rose at annual average rate of 3.6%.
In the third quarter, productivity growth in the nonfinancial corporate sector rose 3.0% SAAR from the second quarter. On a year-over-year basis, a 3.6% increase in output and a 0.8% increase in labor input resulted in the 2.8% labor productivity increase. In the first half, a 1.7% increase at an annual rate from the second half of 2024 resulted from a 2.6% SAAR output increase and a 0.9% increase in hours worked.
he 4.9% Q3 nonfarm business sector productivity increase is suggestive of an improving productivity growth trend. However, one quarter does not a trend make. With first half 2025 trade distortions, presumably in anticipation of rising U.S. tariffs, the year-over-year view shows 1.9% growth, a substantial increase from the 1.5% trend in the post-Great Recession/pre-COVID period.
In addition, the Q3 3.3% QoQ manufacturing sector increase follows two quarters of equally strong productivity improvement. The recent strength follows a sustained period of productivity declines. After reaching a peak productivity level in 2010, productivity fell 6% through late 2024, a historically unprecedented decline. However, the productivity level remains 4% below its 2010 peak.
The manufacturing sector resurgence has largely resulted from outsized improvements in the durable goods sector offsetting continued weakness in the nondurable goods sector. For example, durable goods sector productivity increased 4.7% year-over-year in 2025Q3 while nondurable goods sector productivity increased 1.2% in Q3.
In 2025, nonfarm business sector unit labor costs have returned to pre-COVID rates. The 1.2% Q3 year-over-year increase compares favorably with the 2.0% 2018 increase. After unit labor cost increases reaching 6.0% in 2021, the four-year decline reflects a fall from 10% hour compensation growth in 2021 to 3% in 2025.
Strong productivity growth is a much sought after goal. Such strength offers the prospect of increased wage gains, improved profitability, and reduced pressure on central bankers.
Monetary policy makers, including those at the Federal Reserve, are always eager to find gains in productivity growth. Such gains contribute to slower growth in unit labor costs and, to the extent interest rates are lower, lower capital costs. Consequently, achieving stable prices and targeted inflation rates are more likely. And of course, elected political leaders are happier.
Understanding the causes of the recent productivity improvement will take time. Productivity growth has historical been procyclical. With the strong 2023-2025 GDP growth, it’s likely that many sectors are benefiting from the scale effects of continued expansion.
In addition, 2025 policy actions could also contributing to a hiring slowdown. The federal government workforce is now 90% of its year-ago size and there have been widespread funding reductions as well. The smaller federal sector could be creating cautious hiring decisions among firms doing business with the government, independent of federal contractual commitments. Tarriff-related uncertainty could also be causing firms to seek opportunities to do more with less. And supply-side constraints resulting from immigration restrictions are likely an addition source of resource economization.
The much more popular topic of discussion is the role of artificial intelligence (AI) in the recent productivity growth improvement. Whether the recent gains are cyclical, policy induced, or a reflection of AI’s benefits remains an open question. While there could be some of each, it’s more likely that the gains reflect efficiency improvements as service providers and large nonfinancial corporations return operating scale to prior levels. However, there may be early signs of increasing AI adoption.
AI adoption by U.S. firms now stands at 17.4% according to the Census Bureau’s Business Trends and Outlook Survey. The late December 2024 data reflect a significant increase from the 10% adoption rate reported in late September. The increase largely results from a very significant revision to the survey question wording from use of AI for "the production of goods and services" to use of AI for “any business function.”
The survey also finds that during the next six months, 21% of firms expect to use AI across business functions. Information services firms, largely software providers, expect AI use to increase from 44% to 57% in the next six months. Data processing hosting and related services – largely cloud computing - expect use to increase from 52% to 71% in the next six months.
Perhaps not surprisingly, larger firms report well above average use. The survey finds that firms with 250 or more employees report 33% use and expect AI use to increase to 43% in the next six months. Similarly, firms with 100 to 249 employees report 25% use and expect use to increase to 36% in the next six months.
