The two risks from the 2025 productivity boom
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The Trump administration and the Federal Reserve are both counting on a 2025 productivity boom continuing through 2026 and fueling a continued growth surge.
- There are two key risks: One is that it doesn't happen; the other is that it does.
The big picture: Companies have been able to grow output rapidly over the last couple of years — including in the most recent quarterly reading out Thursday morning — without needing much more labor to do it.
- The good news is that it's driving strong headline GDP growth and should push incomes higher over time. The bad news is that in the near term, it may be contributing to soft labor demand and a difficult job market.
By the numbers: Labor productivity rose at a stunning 4.9% annual rate in the third quarter, the government said Thursday morning, as output rose at a 5.4% rate and hours worked increased only 0.5%.
- In effect, even as hiring slowed way down, companies were still able to produce more goods and services.
- It continues a remarkable run. Over the last two years, labor productivity has risen at a 2.3% annual rate, far better than the 1.1% average in the 2010s.
Between the lines: AI advances might be part of the story. So could a business investment boost fueled by the Trump administration's tax and deregulatory policies. But the timing doesn't completely line up.
- The productivity surge started in the spring of 2023, when ChatGPT still looked more like a novelty than a business tool and when the 2024 presidential election was far off.
- Another potential factor driving the output surge: Companies invested in labor-saving tools and practices made during the super-tight labor market of the post-pandemic era that may be paying off.
- Fed chair Jerome Powell noted last month that "the pandemic may have induced people to do more automation and do more things with computers to replace people," raising hourly output.
Another factor may be what economists at SGH Macro call a "tenure dividend." There is less churn in the labor market right now than usual, with fewer people being hired and fewer quitting.
- As a result, the average worker is more seasoned and thus the workforce is "skewed toward fully onboarded, experienced employees, mechanically boosting output per hour worked," Tim Duy and Josh Lehner wrote in a report.
Zoom out: If the productivity boom continues, it's great news for GDP, the stock market and the nation's long-term fiscal health.
- But it also would imply that companies don't need to do much hiring amid an already-soft labor market, which could limit income growth and therefore overall demand in the economy.
Flashback: For a potential analogue, consider 2002. Productivity growth was spectacular, at 3%. That enabled solid overall GDP growth.
- But it was a crummy year for American workers, as employers shed about 400,000 jobs and the unemployment rate averaged 5.8%.
The bottom line: For continued growth and long-term prosperity, we should hope the productivity surge continues. But there's no guarantee it will translate into a booming job market in the short run.
