Productivity Measurement Analysis series – United States, Q2 2025 by Martin Fleming.
- Nonfarm productivity rebounded by 2.4% in Q2, offsetting a weak Q1 and lifting the first half yearly growth to 0.3%.
- Manufacturing sector productivity rebounded in 2025’s first half after a long period of sustained weakness.
- Recent gains may be cyclical, but structural improvements from technology adoption could be emerging.
- AI adoption is rising, especially among large firms, with early signs of long-term productivity benefits.
General Summary
In the second quarter of 2025, US nonfarm business sector labour productivity increased 2.4% from the prior quarter, as output increased 3.7% and hours worked increased 1.3%, all at a seasonally adjusted annualised rate (SAAR). From the same quarter a year ago, nonfarm business sector productivity increased 1.3%. The 7 August US Bureau of Labor Statistics (BLS) release included preliminary second quarter data.
The BLS reported a revised 1.8% decline in productivity in the first quarter, as a 0.6% output decline accompanied a 1.2% increase in hours worked. Over the first half of 2025, nonfarm labour productivity increased at an annual rate of 0.3%. As is well known, US tariff policy has shifted in the first half of 2025; the Bureau of Economic Analysis reported a first quarter GDP decline of 0.5% SAAR and a 3.0% SAAR increase in the second quarter.
Unit labour costs in the nonfarm business sector rose at a 1.6% SAAR in the second quarter, reflecting a 4.0% increase in hourly compensation and a 2.4% increase in productivity. Unit labour costs increased 2.6% over the last four quarters.
Manufacturing sector labour productivity rose 2.1% SAAR in the second quarter, as output rose 2.3% and hours worked rose 0.3%, all quarter-on-quarter (QoQ) at SAAR. Unit labour costs in the manufacturing sector increased 1.7%, reflecting a 3.8% increase in hourly compensation and a 2.1% increase in productivity. Manufacturing unit labour costs increased 2.5% from the same quarter a year ago.
In the second quarter, manufacturing sector productivity was 1.5% above the year ago level with an annual average growth of 0.5% over the 22 quarters since the fourth quarter of 2019 prior to the onset of the COVID-19 pandemic. Over the same 22 quarter period, unit labour costs rose at annual average rate of 4.0%.
U.S. Productivity and Costs – Second Quarter 2025, Preliminary
Sector |
Quarter-on-year ago comparison, SAAR (Q2 2024) | Quarter-on-quarter comparison (Q1 2021) | Pre-COVID-19 comparison, SAAR (Q4 2019) |
Nonfarm Business | |||
Labour Productivity | 1.3% | 2.4% | 2.0% |
Unit Labour Cost | 2.7% | 1.6% | 3.3% |
Manufacturing | |||
Labour Productivity | 1.6% | 2.1% | 0.5% |
Unit Labour Cost | 4.0% | 4.3% | 4.0% |
Nonfinancial Corporate* | |||
Labour Productivity | 2.3% | -0.4% | 2.6% |
Unit Labour Cost | 0.9% | 4.6% | 2.8% |
*Q1 2025 most recent data. Comparison with Q1 2024, Q4 2024, and Q4 2019.
In the first quarter – the most recent quarterly data available – productivity growth in the nonfinancial corporate sector fell 0.2% SAAR from 2024’s fourth quarter but rose 2.3% from the same 2024 quarter. The first quarter 0.2% decrease resulted from a 0.6% SAAR output increase and a 0.8% increase in hours worked. On a year-over-year basis, a 3.1% increase in output and a 0.8% increase in labour input resulted in the 2.3% labour productivity increase.
Insights into the Q2 2025 Productivity Release
Nonfarm business sector productivity increased 0.3% in the first half of 2025 as a 1.8% decline in the first quarter was offset by a 2.4% increase in the second quarter. The weak first half followed a somewhat stronger second half of 2024 for a 1.3% year-over-year increase in the second quarter.
The productivity growth slowdown reflected trade distortions, presumably in anticipation of rising US tariffs. Over the two quarters, consumer spending growth slowed to just 0.9% while the volume of imports declined as a first quarter surge was more than offset by a second quarter decline. Similarly, the first quarter’s substantial increase in the change in business inventories was more than offset by a second quarter drawdown.
Meanwhile, manufacturing sector productivity growth strengthened in the first half. After an extended period of sustained weakness, manufacturing sector productivity grew at an annual rate of 2.9% in 2025’s first half. The entire productivity increase was accounted for by an increase in output in the durable goods sector.
The output increase, according to Federal Reserve Board Industrial Production data, occurred in five industries: aerospace (33%), automotive (30%), computer and electronic products (21%), machinery (9%), and primary metals (9%). The increase in aerospace production was the result of the normalisation of Boeing aircraft production following the end of the fourth quarter machinist strike.
Discussion
Monetary policy officials, including those at the Federal Reserve, are always eager to find gains in productivity growth. Such gains contribute to slower growth in unit labour costs and, to the extent interest rates are lower, capital cost declines. Consequently, achieving stable prices and targeted inflation rates are more likely.
The slowdown in the first half of 2025 in nonfarm productivity growth followed a recent period of improved growth. After a 1.5% annual growth rate in the interregnum between the 2008-2009 Great Recession and the onset of the 2020 COVID pandemic, productivity growth gave way to 2.0% growth in the post-COVID period. Similarly, in the nonfinancial corporate sub-sector, 1.3% growth gave way to an improved 2.6% growth. In contrast, until 2025, manufacturing sector productivity growth showed little improvement, that is, from 0.2% to 0.5%.
The debate over whether the recent productivity gains are cyclical or a reflection of benefits from artificial intelligence (AI) deployment and adoption remains open. 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. However, there may be early signs of increasing AI adoption.
The US Census Bureau’s semi-monthly Business Trends and Outlook Survey found in the second half of July that 9.3% of US businesses were using AI with the expectation that in six months usage will increase to 12.5%. See the figure below. In addition, by enterprise size, those with 250 or more employees report usage of 12.2% with an expected six month increase to 16.9%. Information services firms (principally software vendors) report 25.0% usage with an expectation of an increase to 31.8%. Likewise, professional, scientific, and technical services firms expect 21.5% usage to increase to 27.2%.
It’s very likely that early technology applications, such as generative AI, deployed in very large organisations are contributing to productivity gains. In fact, 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.
US business AI adoption