Weekly Economic Trends and Indicators

The Headlines:

The Bureau of Labor Statistics (BLS) recently reported that nonfarm business sector productivity decreased by 1.5% in the first quarter of 2025 (seasonally adjusted annual rate). This figure was revised downward from their initial estimate of a 0.8% decline.

In contrast, manufacturing productivity was up 4.4% in the first quarter, revised downward slightly from an initial estimate of 4.5%. This is the largest increase since the second quarter of 2021 during the pandemic recovery. Overall manufacturing productivity was pushed upward by durable goods manufacturing where productivity increased at a seasonally adjusted annual rate of 7.2%. Overall, Manufacturing productivity increased by 1.4% over the last year.

The Details:

Labor productivity is simply another term for output per hour. Productivity rises when output increases more than hours worked increases, or when output falls less than hours worked falls. In percentage terms, productivity growth is calculated by subtracting the percentage change in hours worked from the percentage change in output. The 1.5% decrease in overall productivity was a result of a 0.2% decrease in output and a 1.3% increase in hours worked.

A related measure also included in this report is unit labor cost, which increased 6.6% in the first quarter, mainly due to the 5.0% increase in hourly compensation. Unit labor cost was more subdued in the manufacturing sector, only increasing 2.0% in the first quarter. Strong productivity growth helps keep unit labor costs from rising too quickly.

The Context:

Productivity growth and unit labor costs are important considerations when looking at the effects of inflation. Higher inflation leads to wage growth which raises unit labor costs. However, productivity growth can mitigate the effect of wage growth as more output is produced with the same amount of labor. Productivity growth also increases the capacity of the economy and allows for a faster rate of GDP growth without causing inflation to accelerate. As the chart shows, there was a drop in productivity in 2022 which corresponded with a spike in inflation while the long expansion of productivity in 2023 and 2024 helped bring inflation down faster. If this quarterly decrease in productivity growth continues, it could put enough pressure on inflation to delay further interest rate decreases from the Federal Reserve.

Next week: U.S. employment report