US: Productivity and Costs

Highlights

Nonfarm labor productivity is up 2.8 percent from the prior quarter at a seasonally adjusted annual rate in the preliminary fourth quarter 2025 report. Nonfarm labor productivity is revised higher to up 5.2 percent in the third quarter. The fourth quarter increase is above the consensus of up 1.9 percent in the Econoday survey of forecasters. For 2025, annual productivity is up 2.2 percent compared to up 3.0 percent in 2024 and up 2.0 percent in 2023.

Unit labor costs are up 2.8 percent in the fourth quarter 2025, up from down 1.8 percent in the third quarter. The Econoday survey consensus is for up 2.1 percent in fourth quarter unit labor costs. For 2025, unit labor costs are up 1.9 percent compared to up 2.4 percent in 2024 and up 2.0 percent in 2023. Unit labor costs are a ratio of hourly compensation to labor productivity. Wages have been rising steadily in the last few years, although the pace is moderating in 2025. Disruptions in the labor market in from massive layoffs in government in the second quarter and a long federal government shutdown in the third quarter have restrained overall productivity in 2025.

The report includes annual revisions back five years which encompass the annual benchmark revisions to the BLS Current Employment Statistics (CES).

Market Consensus Before Announcement

The delayed first reading for Q4 expected to show much slower productivity growth at 1.9 percent versus 4.9 percent in Q3 and ULC up 2.1 percent versus a decrease of 1.9 percent in Q3.

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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