Weekly Economic Trends and Indicators

The Headlines:

The Bureau of Labor Statistics (BLS) recently reported that nonfarm business sector productivity increased by 3.3% in the second quarter of 2025 (seasonally adjusted annual rate). This figure was revised upward from their initial estimate of a 2.4% increase. Productivity is approximately equal to the difference in the percentage growth rates of output and hours worked. In the second quarter, nonfarm business output increased by 4.4% while hours worked increased by 1.1%.

Manufacturing sector labor productivity was up 2.5% in the second quarter, with output up 2.4% and hours down by 0.1%. Durable goods manufacturing productivity increased by 3.2% while nondurable goods manufacturing productivity was up 1.9%.

Overall, manufacturing productivity increased by 1.6% from the second quarter of 2024 to the second quarter of 2025. This is the largest four-quarter gain in manufacturing productivity since 2021.

The Details:

A related measure also included in this report is unit labor cost, which increased 1.0% in the second quarter. Unit labor cost is the difference in the percentage growth rates of hourly compensation and productivity. In the second quarter, compensation increased 4.3% while productivity increased by 3.3%. Unit labor costs in manufacturing rose more quickly in the second quarter due to the slightly lower productivity growth. Compensation in the manufacturing sector increased by 4.5% while productivity rose 2.5% resulting in a 2.0% increase in unit labor cost.

The Context:

As we have noted previously, productivity growth can mitigate the effects of wage and price inflation. Strong productivity growth keeps unit labor costs contained and increases the capacity of the economy. With price increases due to tariffs now being felt by manufacturers, it is even more crucial for productivity to keep pace. Though it is not clear yet how much the increasing use of AI and other advanced technologies are affecting productivity, we should expect that increased adoption of these technologies will support productivity growth over the long-run. For now, the longer this productivity expansion continues, the better the chances that the Federal Reserve can bring down interest rates without re-igniting inflation.

Next week: Manufacturing in the Quad Cities