Q1 2025: US productivity growth slows with manufacturing and trade distortions

Productivity Measurement Analysis series – United States, Q1 2025 by Martin Fleming.

General Summary and Main Figures

Nonfarm business sector labour productivity decreased 0.8% in the first quarter of 2025 from the prior quarter, as output decreased 0.3 % and hours worked increased 0.6%, all at a seasonally adjusted annualised rate (SAAR). From the same quarter a year ago, nonfarm business sector labour productivity increased 1.4% in the first quarter of 2025. The May 8^th U.S. Bureau of Labor Statistics release included preliminary first quarter data.

As previously reported by the U.S. Bureau of Economic Analysis, first quarter 2025 Gross Domestic Product (GDP) declined at a SAAR 0.3% from the fourth quarter, matching the decline reported by the Bureau of Labor Statistics. Imports surged ahead of tariff increases, leading to the largest drag from net exports on GDP on record.

Unit labour costs in the nonfarm business sector rose at a 5.7% SAAR in the first quarter, reflecting a 4.8% increase in hourly compensation and a 0.8% decrease in productivity. Unit labour costs increased 1.3% over the last four quarters.

U.S. Productivity and Costs – First Quarter 2025, Preliminary

*Q4 2024 most recent data. Comparison with Q4 2023, Q3 2024, and Q4 2019.

Manufacturing sector labour productivity rose 4.5% SAAR in the first quarter of 2025, as output rose 5.1% and hours worked rose 0.5%, all quarter-on-quarter (QoQ) at SAAR. Unit labour costs in the manufacturing sector increased 1.6%, reflecting a 6.2% increase in hourly compensation and a 4.5% increase in productivity. Manufacturing unit labour costs increased 0.7% from the same quarter a year ago.

In the first quarter, manufacturing sector productivity was 1.5% above the year ago level with an annual average growth of 0.5% over the 21 quarters since the fourth quarter of 2019 prior to the onset of the COVID-19 pandemic. Over the same 21 quarter period, unit labour costs rose at annual average rate of 3.7%.

In the fourth quarter – the most recent quarterly data available – productivity growth in the nonfinancial corporate sector rose 4.2% SAAR from the third quarter and 3.7% from the same 2024 quarter. The fourth quarter 4.2% increase resulted from a 4.4% SAAR output increase and a 0.2% increase in hours worked. On a year-over-year basis, a 4.3% increase in output and a 0.5% increase in labour input resulted in the 3.7% labour productivity increase.

Insights into the Q1 2025 Productivity Release

The nonfarm business sector productivity 0.8% decline reflects an unusual 0.3% SAAR quarterly output decline. As reported by both the U.S. Bureau of Labor Statistics and the U.S. Bureau of Economic Analysis, the downturn reflected trade distortions, presumably in anticipation of rising U.S. tariffs. Higher imports were not fully offset by higher inventories and spending, as would be expected if businesses and households were simply frontloading future purchases of foreign products.

The distortions likely reflect a combination of temporary substitution away from domestic purchases ahead of a large spike in import costs and difficulties in capturing swings in inventories as well as business and consumer spending, which tend to be measured less accurately than imports. If the import surged was fully reflected in inventory building or front-running spending, the import surge would have been neutralized in the data.

The 4.5% manufacturing sector Q4 productivity increase was the result of a 5.1% quarterly output increase. As reported by the Bureau of Economic Analysis, business fixed investment rose 9.8% annualised, partially reflecting a 22.5% annualised increase in equipment investment, reflecting a 70% annualised increase in information processing equipment. Similar gains were also reported in the Federal Reserve’s Industrial Production data. The increase boosted GDP growth by one percentage point, largest-ever GDP contribution.

In addition, a 13% annualised increase in transportation equipment was the result of the normalisation of Boeing aircraft production following the end of a machinist strike.

Discussion

 Notwithstanding the first quarter 2025 decline, the post-COVID nonfarm business sector productivity growth improvement continues. After reaching a low of 0.9% in 2014, the nonfarm business sector productivity long-term growth has risen to 1.8%. However, the growth current trend remains below earlier peak rates of more than 3% in the 1960s and 1990s. At 1.8%, the trend is slightly elevated from the 1.5% trend of the 1980s and previous decade. See the figure below.

The debate of whether the recent gains are cyclical or a reflection of benefits from artificial intelligence (AI) deployment and adoption remains an open question.

While there could be some of both, it’s more likely that the gains reflect efficiency improvements as service providers and large nonfinancial corporations return operating scale to prior levels. Historically, productivity growth has been pro-cyclical.

Nonetheless, it’s very likely that early technology applications, such generative AI, deployed in vary large organisations are contributing to productivity gains. The long-term nonfinancial corporate sector productivity growth has risen from 0.8% in 2015 to its current 2.6%. It’s possible long run technology-driven productivity gains are beginning. However, much work and innovation remain ahead.

Despite economy-wide gains, the manufacturing sector continues to stagnate with productivity, output and hours work remaining virtually unchanged over the most recent two years. Manufacturing sector long-term productivity growth has risen form -0.7% in 2017 to 0.6% in 2025, leaving the level unchanged.