Dive Brief:

• Labor productivity sped up during the third quarter to the fastest pace in two years, suggesting that improved efficiency at U.S. businesses may ease wage pressures and slow inflation toward the Federal Reserve’s 2% goal.
• Nonfarm business sector productivity increased 4.9% in Q3 compared with 4.1% during Q2 as output rose 5.4% while hours worked edged up 0.5%, the Bureau of Labor Statistics said Thursday. Unit labor costs fell 1.9% during Q3.
• The average productivity gain of 4.5% from April through September “is unmitigated good news,” RSM U.S. Chief Economist Joe Brusuelas said in a note. If future data shows that businesses are more efficiently using both labor and capital in investments such as artificial intelligence, then the Fed will have more leeway to cut interest rates, he said.

Dive Insight:

Following indications of streamlining by U.S. businesses, Fed officials last month raised their estimate for economic growth this year to 2.3% from a 1.8% estimate in September, according to their median projection.

“The implication is obviously higher productivity,” Fed Chair Jerome Powell said during a Dec. 10 press conference, referring to the upward revision in GDP.  “Some of that may be AI,” he said, noting that sustained consumer spending and business investment in AI is fueling growth.

Large U.S. technology companies may triple their annual capital investment spending to more than $500 billion this year from $150 billion in 2023, according to J.P. Morgan Wealth Management. Spending by Alphabet, Amazon, Meta, Microsoft, Oracle and Nvidia accounts for almost 25% of total U.S. market capital expenditure.

It may be too early to say that AI is lifting productivity, according to economists.

The favorable productivity data released Thursday “will need to survive coming benchmark data revisions to hiring and growth data, but for now this is something to celebrate,” Brusuelas said.

Trump administration trade and immigration policies may undermine any gains in productivity, Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said Thursday in a note.

“The boost to productivity from AI mostly lies ahead, but it will be at least partly countered by a slow-burning drag from the current administration’s policies,” Tombs said.

“Tariffs will lead to a sub-optimal allocation of resources over time, while tougher curbs on immigration will restrict the talent pool for fast-growing businesses to draw on,” Tombs said. Annual productivity growth will likely remain at around 2% during the next few years, he said.

At the same time, the decline in unit labor costs during Q3 “is unambiguously good news for the inflation outlook,” he said.

Falling labor costs bolster the view that gains in the Fed’s preferred inflation measure — the personal consumption expenditure price index minus volatile food and energy prices — will slow near 2% by the end of 2026, Tombs said.