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Q4, 2023: US productivity growth remains strong

Productivity Measurement Analysis series – United States, Q4 2023 by Martin Fleming

General Summary and Main Figures

United States nonfarm business sector labour productivity increased 3.2% in the fourth quarter of 2023, the US Bureau of Labour Statistics (BLS) reported on February 1. The report reflected preliminary fourth quarter data and revised third quarter data based on more recent source data than were available for the preliminary report on December 6.

Nonfarm business sector output increased 3.7% and hours worked increased 0.4% – both quarter-over-quarter (QoQ) at a seasonally adjusted annual rate (SAAR). From the same quarter a year ago, nonfarm business sector labour productivity increased 2.7%.

Unit labour costs in the nonfarm business sector rose 0.5% in the fourth quarter, reflecting a 3.7% increase in hourly compensation and a 3.2% increase in productivity, all QoQ at SAAR. Unit labour costs increased 2.3% over the last four quarters.

For the year 2023, nonfarm business sector productivity rose 1.2%, a reversal from a 1.9% decline in 2022. Unit labour cost rose 2.9%, nearly three percentage points slower than the 5.6% 2022 increase.

 

Sector

Quarter-on-year ago comparison, SAAR (Q4 2022) Quarter-on-quarter comparison (Q3 2023) Pre-COVID-19 comparison, SAAR (Q4 2019)
Nonfarm Business      
Labour Productivity 2.7% 3.2% 1.7%
Unit Labour Cost 2.3% 0.5% 3.9%
 
Manufacturing
Labour Productivity 2.3% -0.8% -0.1%
Unit Labour Cost 4.2% 6.3% 4.5%
 
Nonfinancial Corporate
Labor Productivity NA 2.5% 1.7%
Unit Labor Cost NA 1.2% 3.8%

 

Manufacturing sector labour productivity rose 2.3% in the fourth quarter of 2023, as output decreased 2.4% and hours worked declined 4.6%, all QoQ at SAAR. Unit labour costs in the manufacturing sector increased 4.2%. That reflecting a 6.6% increase in hourly compensation and a 2.3% increase in productivity, all QoQ at SAAR. Manufacturing unit labour costs increased 5.4% from the same quarter a year ago.

For the year 2023, manufacturing sector productivity declined 0.8% – a slightly slower pace than the 1.3% 2022 decline. Unit labour cost rose 5.5%  to more than one percentage point faster than the 4.8% 2022 increase.

Revised third-quarter 2023 measures for the nonfinancial corporate sector were also published in the February release. Productivity increased a revised 2.5% in the third quarter as output and hours worked increased 3.3% and 0.8%  respectively, all QoQ at SAAR. Productivity increased 1.2% from a year earlier. Preliminary fourth quarter data will be released in the next Productivity and Cost release on March 7.

Insights into the Q4 2023 Productivity Release

The February Productivity and Cost release from the BLS incorporates newly published 2023 fourth quarter data and revised third quarter source data from the BLS, the Bureau of Economic Analysis (BEA), and the Board of Governors of the Federal Reserve System.

Strong Q4 US nonfarm business sector productivity growth is the third consecutive quarter of strong productivity growth. Strong output growth, the maturity of the current business cycle, and the possible beginning of long-term productivity improvement have all contributed to productivity growth improvement.

In the fourth quarter, manufacturing sector productivity growth bounced back from a third quarter decline. Quarterly volatility has been persistent in the post-pandemic period. However, the sector’s long-term productivity decline continues with the level now six percent below its first quarter 2011 peak. Over the period, labour hourly compensation rose at an annual rate of 3.9% which was one percentage slower that the increase in the broader nonfarm business sector.

Discussion

The Q4 jump in nonfarm business sector productivity growth is the third consecutive quarterly increase. In the aftermath of the pandemic, supply chains are repairing, goods and services markets are normalising, and labour markets are stabilising. Long-term productivity improvement resulting from technology-driven transformation is beginning to make a contribution to productivity growth improvement.

Understanding productivity growth trends in the period ahead will be challenging as growth is expected to slow while the early benefits of advanced digital technology and artificial intelligence (AI) could begin to appear.

At the January 31 press conference following the Federal Open Market Committee meeting, Federal Reserve Board Chair Jay Powell was asked if the recent productivity increase was due to temporary factors – the labour market and supply chain improvements – and it would fade over time. Chair Powell’s response:

“Productivity tends to be based on…fundamental aspects of our economy. (Will) it be the case that we come out of this more productive on a sustained basis? I don’t know. What would it take? (My) guess is that we may shake out and be back where we were because I don’t — I’m not sure I see—work from home doesn’t seem like it’s a big productivity increaser. AI – artificial intelligence, generative – may be, but probably not in the short run; probably maybe in the longer run.

“I’m not seeing why it would…right now. I would say that productivity is…what falls out of the broader forces that are driving people in and out of the labour force, and activity returning, and supply chains getting fixed.”

As Chair Powell observes, the timing and magnitude of AI’s effects on productivity growth would 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 as much as 0.5 percentage points early in the next decade.

Barriers to AI adoption are substantial. Not only does the technology sector need to transform and grow but business leaders and workers need to find new ways of working. Success will require time.