Revised Productivity in Q4: Slightly Better Than Previously Believed
Summary
- Benchmark revisions showed upward adjustments to productivity for both 2023 and 2024.
- Little apparent influence from AI thus far.
The revised reading on labor productivity for the fourth quarter of last year was slightly firmer than previously estimated, now showing growth of 1.5% rather than 1.2% (annual rates). The adjustment reflected a slight revision to output growth (2.4% rather than 2.3%, an outcome consistent with the modest adjustment to GDP growth). Businesses achieved these output gains with fewer labor hours, which grew 0.8%, down from the previous estimate of 1.0%.
The positive revision to productivity bodes well for the inflation outlook, as it provides more cushion for businesses to absorb costs. The favorable inflation-related news was reinforced by a downward adjustment to labor compensation per hour, which grew 3.8% versus the initial estimate of 4.2 percent. The combination of firmer productivity growth and slower growth in compensation per hour left the growth of unit labor costs at 2.2%, noticeably slower than the initial estimate of 3.0%.
Today’s report also contained benchmark revisions to results in the prior two years, and the new figures were generally positive. Over the four quarters of 2024, productivity growth was 0.4 percentage point firmer than previously believed (2.0% versus 1.6%), while 2023 showed similar improvement (3.1% versus 2.7%). Declines in hours worked were the driving force behind the improvements in productivity. The upward revision to productivity in 2024 was joined by slower growth in compensation per hour (4.1% rather than 4.4%), which provided more inflation protection. Unit labor costs (compensation adjusted for productivity) grew 2.0% over the four quarters of 2024, slower than the previous estimate of 2.7%.
Many observers are hopeful that the spread of Artificial Intelligence, will lead to a burst in productivity, but there is scant evidence of a meaningful effect thus far. Productivity has been firm in the past two years, but no better than the norm during an economic expansion. (Productivity tends to be firm in the early stages of a business expansion, as firms move from suboptimal levels of production to more efficient levels. Also, recessions can trigger changes to business models and staffing that generate productivity gains.)
While AI does not seem to have had much effect thus far, this result is not surprising. Individuals and businesses have just started to experiment with the new technology, and it will most likely take several years to bear fruit. The February Blue Chip survey of economic forecasters asked about the prospects for productivity gains from AI, and only 17% of respondents expected noticeable gains in the next three years. However, 57% expected notable results over a three-to-five-year span, and 26% felt that gains would take more than five years.
The productivity and labor cost data are available in Haver’s USECON database. The Action Economics expectations figures are in the AS1REPNA database.
Michael J. Moran
AuthorMore in Author Profile »Before joining Haver Analytics in 2025, Michael J. Moran was the chief economist of Daiwa Capital Markets America Inc. He was responsible for preparing the firm’s economic forecast and interest rate outlook. He traveled frequently to visit the clients of Daiwa Capital Markets and wrote weekly economic commentary. Mr. Moran also was involved in the flux of financial markets, as he spent a portion of each day on Daiwa’s trading floor interpreting economic statistics and Federal Reserve activity for traders and salespeople. Mr. Moran is quoted frequently in the financial press, and he appears regularly on cable news shows. He also has published articles in several journals and periodicals. Before joining Daiwa Capital Markets America, Mr. Moran worked as an economist at the Federal Reserve Board in Washington, D.C. where he analyzed a broad range of issues dealing with the financial sector of the economy and regularly briefed the Board of Governors. He was on the faculty of Pennsylvania State University from 1979 to 1980 and taught on a part-time basis at George Washington University from 1980 to 1987.
Mr. Moran received his Ph.D. in economics from Pennsylvania State University in 1980 and a B.S. in business administration from the University of Bridgeport in 1975. He was a CFA charter holder from 2002 until 2016.
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