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– Jul 11th, 2023

Q1, 2023: Waiting for AI Technology – Productivity Declines in the Post-Pandemic Period

Productivity Measurement Analysis – United States, Q1 2023 analysis by Martin Fleming

The hype surrounding generative Artificial Intelligence (AI) has created the expectation of strong productivity growth and a reversal of decades-long stagnation. In fact, there is much to do to capture the technology’s benefits and current data show the challenges ahead.

Despite rapid AI technology advances, the 2.1% decline in the level of Q1 2023 United States nonfarm business sector productivity is a disappointing continuation of weak productivity performance in the post-pandemic period. The Bureau of Labor Statistics’ June revision to the US productivity data shows only a marginal improvement after a very weak initial report. In Q1, output grew at an annual rate of 0.5% and hours worked increased by 2.5%.

With fewer workers but well-established business models, the chaos of the pandemic resulted in a burst of 2020 productivity growth that began to fade in the second half of 2021. As hiring has resumed, productivity has declined. Such a trend repeats the 2008 – 2009 Great Recession performance when layoffs and subsequent rehiring resulted in, very similar, countercyclical productivity behaviour. Although the 2008-2009 recession and its aftermath – through 2017 – stretched over a longer period, what appears to be happening in 2021-2023 is similar but over a much shorter period after the pandemic.

The recent data further shattered expectations as the US nonfinancial corporate sector – 65% of the US private business sector – continues to show weak productivity performance with a 4.3% Q1 decline. However, in contrast to the broader nonfarm business sector, output in the nonfinancial corporate sector fell at a much larger 1.9% annual rate in Q1. The corporate sector, of course, is much more deeply invested in technology, so one might expect the productivity benefits to be greater. In addition, despite being in the early days of a nascent technology, the economics of AI favour organisations with scale. The poor performance of the US corporate sector remains an area of huge concern.

By implication, the one-third of the U.S. economy that is not part of the nonfinancial corporate sector – the financial services sector (10%) and the noncorporate sector (23%) – continues to benefit from above average productivity growth. It’s not surprising that the financial services sector continues to find improved operating performance. However, it is somewhat surprising that in the noncorporate sector – largely small and medium businesses – the innovation and creative of workers and business leaders are having success where technology is more expensive and skilled resources are more difficult to recruit.

Like the corporate sector, the manufacturing sector’s productivity performance is equally mysterious and surprising. Automation, including the adoption of robotics, has long been the focus of manufacturing sector business leaders. However, the productivity benefits are lacking. After 15 years of productivity stagnation – the productivity level is currently just where it was in 2007 – productivity has declined in four of the five quarters since the end of 2021. In Q1:2023, manufacturing sector productivity declined at an annual rate of 2.5% with a 1.0% decline in output and a 1.6% increase in hours worked.

  • Read the analysis for Europe and the UK