U.S. productivity growth accelerates as third-quarter labor costs fall

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Highlights

U.S. nonfarm productivity grew at a 3.6% annualized rate in Q3, beating forecasts and accelerating from Q2’s revised 2.1% pace.
Unit labor costs fell 0.7% in Q3, the first quarterly decline since Q2 2025, defying expectations for a 0.6% increase.
Benign labor cost trends reduce wage-driven inflation risks, allowing the Federal Reserve to keep rates steady at 3.75%–4.00% while monitoring inflation.

Third-quarter productivity and labor cost trends

As reported by Reuters, citing the U.S. Labor Department's Bureau of Labor Statistics, nonfarm productivity, which measures hourly output per worker, increases at a 3.6% annualized rate in the third quarter after an upwardly revised 2.1% pace in the April-June period.

Economists polled by Reuters had forecast a 2.8% increase after a previously reported 1.4% growth rate in the second quarter. On a year-over-year basis, productivity grows at a 2.1% rate, though economists note that the measure can be volatile from quarter to quarter.

Unit labor costs, the price of labor for a single unit of output, fall at a 0.7% rate in the quarter, the first decline since the second quarter of 2025. That follows an upwardly revised 1.9% increase in the prior quarter, while economists had expected labor costs to rise at a 0.6% pace after a previously reported 1.2% gain.

Inflation outlook and Federal Reserve implications

The labor cost figures follow data released last week showing a moderate increase in the Employment Cost Index, the broadest measure of labor costs, in the third quarter. Together, the readings support arguments from economists and policymakers that the jobs market is not a meaningful source of inflation pressure.

That benign wage backdrop gives the Federal Reserve more room to focus on rising price pressures linked to the ongoing U.S.-Israeli war with Iran. The central bank last week leaves its policy rate unchanged in the 3.75% to 4.00% range while acknowledging that inflation remains elevated, and economists expect borrowing costs to rise in December.

Economists and policymakers are also watching whether heavy spending on artificial intelligence translates into sustained productivity gains. If those improvements continue, businesses could see better output growth without a matching rise in labor-driven inflation.

In our earlier article on AI agents’ early impact in large U.S. companies, we noted that many CEOs are already seeing efficiency and growth benefits, even if only a small share consider the technology truly transformational so far. The survey also pointed to continued heavy investment in AI infrastructure alongside hiring and retraining plans, suggesting AI adoption may boost output while reshaping workforce needs over time.

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