Why productivity keeps climbing while the labor market stays flat

It’s an economic conundrum: How can the U.S. economy be growing at a decent clip while the labor market remains stalled?

The Labor Department third quarter productivity report — out Thursday, delayed due to the government shutdown — might just hold an answer. It shows productivity grew at the fastest pace in two years: a 4.9% annualized gain. 

The big jump is not a surprise to Gerald Cohen, finance professor and chief economist of the University of North Carolina at Chapel Hill’s Kenan Institute of Private Enterprise.

“We knew that [gross domestic product] was quite strong in the third quarter, and employment, and in particular hours worked, was quite weak,” Cohen siad.

The gap in between is filled by strong productivity. Inflation and new tariffs are making businesses reluctant to hire and they’re getting more out of each worker they already have. 

But Cohen, whose research focuses on productivity, said it remains to be seen if the gains so far are a long-term trend. 

“If we saw strong labor force growth and strong productivity growth, I would feel better about this productivity number, and say, ‘Oh yeah, maybe this is something,’” he said.

But plenty of analysts on Wall Street did think it’s something.

“We could be seeing at least the initial stages of some payoff, in particular of the AI-driven automation,” said Sal Guatieri, senior economist at BMO Capital Markets. “Near term, it does imply that businesses are still cautious about hiring … but hopefully long term, we will see some of those productivity gains spilling down to workers.”

“Spilling down” in the form of higher wages. 

Meanwhile, the Federal Reserve may find productivity data a reason to cut rates, said Richard de Chazal, macro analyst at William Blair. 

“Productivity growth should help to dampen inflation pressures … and in theory, could mean that the Fed can keep rates lower, which is probably what this Fed wants to do at the moment,” he said.

Keep in mind, the Labor Department’s productivity measure is notoriously volatile. The Fed will be looking for consistent — convincing — gains.