Productivity jumps 3.6% as businesses maximize output

The increase in output was driven by a 3.7% annualized rise in nonfarm output while the hours worked only increased by 0.1%. This suggests companies are achieving growth without substantial increases in labor, aligning with expectations surrounding recent investments in artificial intelligence.

Unit labor costs decreased to 124.39 from 124.6 in the second quarter, the first decline since the second quarter of 2025. This margin improvement allows companies to produce more goods with the same payroll expenses.

Corporate profits have also surged, reaching an annual rate of $4.71 trillion in the second quarter, a 20.8% increase compared to the previous year. Manufacturing profits specifically saw a jump to $1.05 trillion from $812 billion.

However, workers have not proportionally benefited from this productivity surge. Labor’s share of nonfarm business output fell to 53.0%, the lowest level in records dating back to 1947. While real hourly compensation rose 1.1% during the quarter, inflation-adjusted average hourly earnings for private workers in September stood at $11.26, slightly below the $11.32 recorded a year earlier.

While some attribute the productivity gains to AI, the Bureau of Labor Statistics data doesn’t isolate AI’s impact. Growth in heavy industries, such as mining (13.7% value added) and manufacturing (5.5%), also contributed significantly. A Meta Platforms executive recently emphasized the importance of AI-driven productivity gains due to concerns about “population collapse” and a limited labor supply.

Despite the productivity boost, inflation remains a concern. Average hourly earnings reached $38.00 in October, up from $36.85 a year earlier, yet unit labor costs still rose 2.4% year-over-year. The core Personal Consumption Expenditures price index reached a new high of 0.3% in September, and Real GDP grew at a 3.4% annualized pace.

Future reports will be closely watched for revisions to the third-quarter productivity data and to assess whether the trend continues. A sustained period of high productivity coupled with stagnant hours worked would further solidify the profit-driven nature of the boom, while rising hours alongside output could signal a more equitable distribution of gains.