Productivity Measurement Analysis series – United States, Q3 2023 by Martin Fleming
U.S. nonfarm business sector labour productivity increased 5.2% in the third quarter of 2023, the U.S. Bureau of Labor Statistics (BLS) reported on December 6th. The report reflected revised third quarter data based on more recent source data than were available for the November 2nd preliminary report.
Nonfarm business sector output increased 6.1% and hours worked increased 0.9%, both quarter-over-quarter (QoQ) at a seasonally adjusted annual rate (SAAR). The increase in labour productivity is the highest rate since the third quarter of 2020, when productivity increased 5.7%. From the same quarter a year ago, nonfarm business sector labour productivity increased 2.4%.
Unit labour costs in the nonfarm business sector decreased 1.2% in the third quarter, reflecting a 3.9% increase in hourly compensation and a 5.2% increase in productivity, all QoQ at SAAR. Unit labour costs increased 1.6% over the last four quarters.
|
Sector |
Quarter-on-year ago comparison, SAAR (Q3 2022) | Quarter-on-quarter comparison (Q2 2023) | Pre-COVID-19 comparison, SAAR (Q4 2019) |
| Nonfarm Business | |||
| Labour Productivity | 2.4% | 5.2% | 1.7% |
| Unit Labour Cost | 1.6% | -1.2% | 3.8% |
| Manufacturing | |||
| Labour Productivity | -0.7% | -0.8% | 0.0% |
| Unit Labour Cost | 5.2% | 6.2% | 4.2% |
| Nonfinancial Corporate | |||
| Labour Productivity | 1.2% | 2.2% | 1.8% |
| Unit Labour Cost | 3.3% | 1.7% | 3.8% |
Manufacturing sector labour productivity declined 0.8% in the third quarter of 2023, as output decreased 0.3 percent and hours worked increased 0.5 percent, all QoQ at SAAR. Unit labour costs in the manufacturing sector increased 6.2%, reflecting a 5.4% increase in hourly compensation and a 0.8% decrease in productivity, all QoQ at SAAR. Manufacturing unit labour costs increased 5.2% from the same quarter a year ago.
Preliminary third-quarter 2023 measures for the non-financial corporate sector were also published in the December 6th release. Productivity increased 2.2% in the third quarter as output and hours worked increased 3.1% and 0.8%, respectively, all QoQ at SAAR. Productivity increased 1.2% in the nonfinancial corporate sector over the last four quarters.
Insights into the Q3 2023 productivity release
The December 6th update incorporates updated second and third quarter source data from the BLS, the Bureau of Economic Analysis (BEA), and the Board of Governors of the Federal Reserve System. Measures of output for the manufacturing sectors incorporate revised annual benchmark data from 1987 to 2021 released November 21 by BLS. The most notable revisions to manufacturing output data occurred with several upward revisions in 2018 and 2019 of between 0.1 and 0.3 percentage points and several downward revisions in 2020 and 2021 of between 0.1 and 0.3 percentage points.
Strong 3Q US nonfarm business sector productivity growth signals the end of the post-pandemic era, the maturity of the current business cycle, and the possible beginning of long-term productivity improvement. The outsized jump in nonfarm business sector productivity was a substantial surge in that it includes a much more limited 2.2% productivity increase in the nonfinancial corporate sector and a 0.8% decline in manufacturing sector productivity.
The nonfinancial corporate sector accounts for 65% of value created in the US economy and the manufacturing sector accounts for 11% of value creation. While there is some overlap between the two sectors, if the remaining sectors account for 30% of value creation, third quarter productivity in those sectors must have grown in excess of 10%.
Post-pandemic adjustments
The substantial jump in 3Q productivity growth is largely a result of continued readjustment in the aftermath of the pandemic – supply chains are repairing, goods and services markets are normalising, and labour markets are stabilising.
The timing and magnitude of artificial intelligence’s (AI’s) effects on productivity growth will occur over a ten-year horizon. Depending on the rate and pace of the development of the technology sector – needed to supply the necessary tools, models, and applications – three to five years could be required to realise meaningful economic gains with potential GDP increasing by 0.5pp early in the next decade.
Over the next year, understanding productivity growth trends will be challenging as the maturity of the current business cycle will bring slower employment growth accompanied by somewhat stronger output growth. However, over the year some of the early benefits of advanced digital technology and AI will also begin to appear.
To assess the long-term technology outlook, and thus productivity, there are two important concepts:
- the technical feasibility versus the economic feasibility of AI and
- the likelihood that the new business models necessary to deliver AI services are appearing.
The challenge AI applications face is one of scale. Very large investments are required. Each new model version costs tens of millions of dollars. There is an entirely new industry emerging that will supply AI capabilities as-a-service, based in part on open-source models. The eventual success of such an emergent industry will require addressing issues of business model innovation, capital risk, and user acceptance.
Barriers to AI adoption are substantial. Not only does the technology supply sector need to transform and grow but business leaders and workers need to find new ways of working. Success will require time.
