Strong Q3 labor output shows a productivity surge

• It follows three softer quarters of productivity growth that had cast doubt on a post-pandemic surge in businesses continuing to find ways to create more output from a finite labor supply.
• Unit labor costs — how much businesses spend on labor for each unit of output they produce — fell at a 0.7% rate in Q3, a disinflationary sign that could reassure the Federal Reserve that price pressures are under control.

Reality check: Quarterly productivity data is volatile and can offer more noise than signal. Longer time horizons give a more reliable signal.

• Over the last three years, labor productivity has risen at a 2.6% annual rate. It was higher than that in the 2022-2025 period, but the recent results easily surpass the roughly 1% annual productivity gains seen in the 2010s.
• That should allow for stronger gains in growth and incomes over time, even as demographic change constrains the supply of labor.

The intrigue: The rising use of AI may be part of the productivity story, but given the surge started years ago, there's reason to think that it has more to do — for now, at least — with changes in work processes, more intensive use of capital and a burst of entrepreneurship in recent years.

• Richard de Chazal with William Blair wrote in a note that there is "still-limited evidence that this represents a broad AI-driven productivity boom."
• "Rather, we see much of the more recent improvement as being the result of post-COVID restructuring, efficiency gains, and capital deepening, as well as some early AI-related benefits," he added.

Of note: In its recent policy statements, the policy-setting Federal Open Market Committee has said that productivity growth is "strong," but that didn't really align with the numbers in late 2025 and the first half of 2026.

• The strong third-quarter result puts the data more closely in line with the Fed's description of the state of affairs.