The Productivity Boom Has Arrived. AI May Not Be the Reason

The US economy seems to be in the throes of one of its biggest bursts of productivity in decades, weighing on business labor costs and hastening the disinflation process. If artificial intelligence is partly the reason for the gains, then it’s plausible that we’re in the early days of durable improvements to efficiency. And yet, the numbers are also shrouded in mystery, and the Federal Reserve should greet them caution rather than as a green light to keep lowering interest rates.

Labor productivity, or nonfarm employee output per hour, increased at a 4.9% annualized rate in the third quarter, the strongest since 2023, according to the Bureau of Labor Statistics. Excluding the bounce-back quarters around recessions, it was the second-strongest reading in two decades. Meanwhile, unit labor costs plunged for a second consecutive quarter, dropping 1.9% after declining 2.9% in the April through June period (originally reported as an increase of 1%.)