Big productivity growth explains more output and profit without more jobs

One of the mysteries of the delayed economic data has been why we allegedly had large economic growth of 4.3% (beyond inflation), but job growth is near zero, and consumer sentiment is at multi-year lows.

Which is why today’s report on US worker productivity cleared up some of that confusion to me.

Nonfarm productivity, which measures hourly output per worker, accelerated ‌at a 4.9% annualized rate, the Labor Department's Bureau of Labor Statistics said on Thursday.

That was the quickest pace since the third quarter of 2023 and followed an upwardly revised ⁠4.1% growth rate in ‌the second quarter. Economists polled by Reuters had forecast productivity would grow at a 3.0% ‍rate after a previously reported 3.3% pace of expansion in the April-June quarter….

Productivity grew at a 1.9% rate from a year ago. ‌Businesses are spending on AI, which economists said could further boost productivity. The jump in productivity helps to explain the gap between strong gross domestic product growth and a lackluster labor market. The economy grew at a robust ⁠4.3% rate in the third quarter. In contrast, private job gains averaged 55,000 per month in the three months through October.

It’s worth looking back to see how we got here.

Productivity jumped as workers got laid off at the start of the COVID pandemic, and then it leveled off as Americans returned to work as the pandemic waned. But you can see that productivity was still 4% higher than it was pre-COVID at the end of 2022, leading to a sizable increase in output. Then you can see that while total hours worked has only had a slight increase from the start of 2023 to today, productivity has kept rising, taking output along with it.

This trend of higher productivity and output with flatlining hours worked is especially apparent in manufacturing, where hours worked peaked in early 2023. In the two years after that, productivity flattened out for the next 2 years and output dropped. But for 2025, productivity has picked up so much that output is also growing, while jobs and hours worked keep going down.

But a big difference from 2023’s jobs and productivity situation and 2025’s is that workers are not reaping as many benefits from their higher productivity and output. At the end of 2023, unit labor costs were up by 1.8% over the last 12 months, and at the end of 2024, labor costs were up 2.6% from the end of 2023. This is not the case in 2025.

Unit labor costs - the price of labor per ‍single unit of ⁠output - decreased at a 1.9% rate in the third quarter. That followed a 2.9% pace of decline ⁠in the April-June quarter. Labor costs increased at a 1.2% rate from ‌a year ago.

That’s a 1.2% increase in worker pay per unit before inflation, which is estimated at around 2.9% over the last 12 months in that report. And inflation-adjusted (real) hourly compensation for workers has declined in each of the last 2 quarters (-0.2% in Q3 and -0.5% for Q2).

The productivity report also shows the effects of 2025’s tariffs and other non-labor cost increases. Many of those tariffs started in April, and take a look at what happened to non-labor costs for businesses in the 2 quarters measured in between.

So businesses have been paying quite a bit more for materials and shipping and other costs following Trump’s “Liberation Day” tariffs, but the higher productivity and lack of wage increases for workers keeps total costs in check. Add in price increases for consumers, and the profits roll in to record levels.

Which means that everyday Americans are paying more but aren’t earning any more, and when you combine it with the Bubbly stock market, all of the economic growth proceeds roll to the top.

Which helps to explain this report that came out this week.

Americans grew more worried about the job market in December even as anxieties over personal finances faded, while near-term inflation expectations increased, a report from the New York Federal Reserve showed on Wednesday.

Respondents in the regional Fed bank's latest Survey of Consumer Expectations said the prospect of ‌finding a job if unemployed was the worst since the report began in 2013. The worries about getting a new job were led by ‌households that earned under $100,000 per year.

Job market anxieties were uneven in the final month of 2025, the New York Fed said, as expectations that the unemployment rate would rise ebbed in December relative to the prior month, while the probability assigned to losing a job rose relative to November. The survey also found a lower probability of leaving a job voluntarily in ⁠December versus the prior month.

So maybe that 4.3% GDP number from Q3 isn’t as BS as I originally thought it was, because the owners and paper-traders apparently were seeing things boom this Summer.

But the non-rich sure aren’t experiencing an economy that’s anything like one that would have 4.3% growth. And let’s see if that trend of low hiring and tiny wage increases continued at the end of 2025, with the release of the December US jobs report tomorrow. (Well, if we can trust the numbers, of course).