Weekly Economic Trends and Indicators
The Headlines:
The Bureau of Labor Statistics (BLS) reported on Tuesday that nonfarm business productivity increased by 1.8% in the 4th quarter of 2025. This was down from 5.2% and 4.2% increases in the 2nd and 3rd quarters, respectively. Nonfarm business productivity increased by 2.1% for the entire year, down from 3.0% in 2024.
Manufacturing productivity decreased by 2.5% in the 4th quarter after very strong growth throughout the year. For the entire year, manufacturing productivity was up 1.9%--the best performance in the last 10 years except for the few months of the sharp rebound from the COVID recession.
The Details:
Nonfarm business productivity in 2025 was driven by strong output performance. Hours worked increased by 0.4%. However, unit labor costs also increased by 4.4% in the quarter and 2.3% for the year. The result should sound familiar: rising labor costs constraining employment growth. Even so, output is still growing as businesses learn to do more with less, often helped by adoption of AI.
The story for manufacturing is slightly different. Labor costs were up by 6.3% in the quarter and 4.4% for the year. Hours worked actually decreased by 0.3% for the quarter and 0.9% for the year.
The Context:
The question on the minds of many is how this news and other recent developments are affecting the overall economic growth outlook for the rest of 2026. As the year began, most expected growth to remain close to, or even slightly above, recent trend levels despite a slowing labor market. In fact, if the labor market was performing more like an economy with 2% real GDP growth, many would be inclined to say that this economy is very well positioned for continued expansion.
However, the struggling labor market is one reason that productivity growth is more crucial right now—and risks to productivity are more consequential. Unfortunately, one of those risks, in the form of higher oil prices, just took center stage this month.
Increases in oil prices harm productivity by driving up the cost of any good that is transported to market, as well as the cost of many services. The current spike in oil prices may be too late in the quarter to significantly affect this quarter’s productivity number, but if the price of oil were to remain over $100 per barrel for an extended period, it could have more of an impact in the 2nd quarter.
Due to the underlying strength of the economy, this need not lead directly to a recession, but it could slow growth below trend. If higher oil prices continued for a few months, the best case would be something like 2017 when OPEC production cuts caused oil prices to rise at the same time the Fed was raising interest rates. Real GDP growth continued to exceed 2.5% into 2018 but dropped down to just under 2% by the first quarter of 2019.
What happened to manufacturing productivity during that time? It fell by 5.6% in the 3rd quarter of 2017 as oil prices and interest rates were moving up in tandem before recovering for a couple quarters and going on an extended slide into the COVID recession.
Is this a comparable scenario? Yes and no. This oil price spike was more sudden and could be of longer or shorter duration depending on how the situation in Iran evolves. The effects could quickly reverse if oil begins flowing through the Strait of Hormuz. Manufacturing productivity is considerably stronger today than in 2017, even with the decline in the last quarter. Finally, the Fed is unlikely to raise short-term rates as in 2017, but the bias seems to be shifting away from further cuts until there is genuine progress on inflation.
If last quarter’s drop in productivity was simply a case of a strong economy catching its breath, then we should be able to withstand the current level of oil prices and interest rates for a little longer. However, if oil prices were to spike even higher than their current levels and remain there for an extended period, the growth consequences would be more severe. One early sign of possible trouble would be if first quarter productivity comes in much lower than expected. Though the latter scenario remains unlikely, it must enter the calculation when considering the growth outlook for the remainder of the year.
Next week: Crude oil and gasoline price history and trends
