US: Productivity and Costs

Highlights

An altogether unremarkable report with no revision in productivity growth at 4.9 percent for Q3 and for unit labor costs at minus 1.9 percent, matching expectations for no changes. This also reflects also no overall revision in reported output, hours worked hourly compensation, and real hourly compensation. There were some nice upward revisions in productivity within the report, especially in durable goods manufacturing.

Within the report: manufacturing productivity is now up 3.7 percent rather than 3.3 percent previously reported. That reflects a 0.4-percentage point upward revision to output. Durables manufacturing productivity is up 5.4 percent rather than 4.7 percent as previously reported, and nondurable goods manufacturing productivity is revised up to an increase of 1.3 percent from the previous 1.2 percent. Total manufacturing unit labor costs are revised down 0.4 percentage point to an increase of 1.1 percent due to the upward revision to productivity.

Nonfinancial corporate sector productivity is revised up 0.3 percentage point to an increase of 3.3 percent in the third quarter of 2025, reflecting a 0.3-percentage point upward revision to output. Hours
worked are not revised. Unit labor costs in the nonfinancial corporate sector are revised down 0.3 percentage point to an increase of 0.3 percent.

Market Consensus Before Announcement

Q3 expected unrevised at 4.9 percent productivity growth with ULC unrevised at minus 1.9 percent.

* This report was originally scheduled to be released on December 9, 2025 but was rescheduled due to the US Government Shutdown.

Definition

Productivity measures the growth of labor efficiency in producing the economy's goods and services. Unit labor costs reflect the labor costs of producing each unit of output. Both are followed as indicators of future inflationary trends.

Description

Productivity growth is critical because it allows for higher wages and faster economic growth without inflationary consequences. In periods of robust economic growth, productivity ensures that inflation will remain well behaved despite tight labor markets. Productivity growth is also a key factor in helping to increase the overall wealth of an economy since real wage gains can be made when workers are more productive per hour.

Productivity and labor cost trends have varied over the decades. In the late 1990s, some economists asserted that dramatic productivity advances (based on new technologies) were then allowing the economy to sustain a much faster pace of growth than previously thought possible. Initially, some Fed officials expressed skepticism but later decided that productivity gains had helped boost economic growth and potential GDP growth during the 1990s. That is, the economy could grow faster than previously believed without igniting inflation.

Determining the source of productivity gains has become trickier over the last decade as new technology continues to be incorporated into production - not just in the U.S. but overseas also. Similarly, retraining U.S. workers has been sporadic. Not just low skill jobs are outsourced but now many highly skilled jobs such as programming and accounting are as well. Nonetheless, highly skilled professional jobs have been increasingly difficult to fill during times of high demand. Despite the cross currents in labor market trends, long-term productivity gains are important for maintaining growth in labor income and keeping inflation low.

But in the short-term, output and hours worked can shift sharply just due to cyclical swings in the economy. During the onset of recession, output typically falls before hours worked. This can result in a temporary drop in productivity and a spike in unit labor costs. So, while long-term productivity determines the"speed limit" for long-term growth, one should not be misled by short-term cyclical gyrations in productivity numbers as reflecting the true, underlying trend.

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