U.S. economy's secret weapon surges in third quarter, raising hopes of AI payoff

By Greg Robb

Third-quarter productivity increases at 4.9% pace

Economists think investment in technology is helping companies do more with less labor.

One of the biggest drivers of a strong U.S. economy - worker productivity, - surged over the summer and in early fall, raising hopes that investment in artificial intelligence is beginning to pay off.

U.S. productivity accelerated to a 4.9% annual clip in the third quarter, the government said Thursday. That's the fastest pace in two years.

The gain was in line with forecasts of economists surveyed by the Wall Street Journal.

Productivity has been steadily improving, and some economists expect the trend to continue.

Unit labor costs fell 1.9% in the third quarter, a sign that labor costs are not driving inflationary pressures.

Key details: On a year-on-year basis, productivity accelerated to a 1.9% gain from 1.5% in the prior quarter.

In the third quarter, output rose at a 5.4% annual clip, while hours worked rose 0.5%.

Hourly compensation, adjusted for inflation, fell 0.2% in the third quarter.

Big picture: "Productivity will be key to determining the economy's speed limit and inflationary dynamics. If productivity growth continues to accelerate due to tax cuts, deregulation and technological advancements, including AI, economic growth can pick up without causing unwanted inflation," Matthew Martin, senior economist at Oxford Economics, said in a research note.

Reluctant to pass along higher prices from President Donald Trump's tariffs to their customers, businesses have used automation and reduced hiring to offset cost increases, Richmond Fed President Tom Barkin said in a speech on Monday.

However, many economists warn that it is too soon to know whether higher productivity trends will persist.

Looking ahead: "It's tempting to think productivity gains in 2025 were driven by AI. It may be having a benefit on the margin, but it's likely too early to say AI is a driving force. AI's productivity boost - if it indeed occurs - will likely take years to play out," Oren Klachkin, financial markets economist at Nationwide, said in a note to clients.

Market reaction: Stocks SPX were mixed on Thursday, with tech stocks down while the 10-year Treasury note yield BX:TMUBMUSD10Y rose to 4.178%.

-Greg Robb

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