Catching a breath: Productivity growth moderates at the end of 2024

Summary

Nonfarm labor productivity increased at a 1.2% annualized rate in the fourth quarter. While Q4's gain was softer than the past few quarters, labor productivity rose 2.3% in 2024 and continues to look stronger on trend relative to the prior cycle.

The more subdued reading on productivity growth in Q4 along with a pickup in compensation costs pushed up unit labor costs growth to a 3.0% annualized rate over the quarter. While this measure points to labor cost running a bit hot relative to the Fed's 2% inflation goal, we take more signal from the medium-term trend in productivity growth and the Employment Cost Index, which makes labor costs look like less a threat to the Fed's inflation objective.

Productivity growth moderates in Q4

The U.S. workforce continues to do more with less. Nonfarm labor productivity, or output per hour worked, increased at a 1.2% annualized rate in the fourth quarter (chart). While the quarterly gain was softer than the past few quarters, the choppiness in output growth makes readings of productivity growth volatile on a quarter-to-quarter basis. Smoothing through the quarterly noise, labor productivity rose 2.3% in 2024, an improvement from the 1.6% rise in 2023.

The strong performance in 2024 has helped to lift productivity growth closer to its historical (post-WWII) average. Over the current business cycle (2019–2024), nonfarm labor productivity growth has averaged a 1.8% annual pace, a few tenths higher than the 1.5% pace averaged over the prior cycle (2007–2019) and a stone's throw away from the economy's long-term average of 2.1%. The recent strength may reflect some catch up after anemic growth before the pandemic (chart). Productivity was noticeably lackluster following the Great Recession, as the scars from the downturn depressed capital investment and weighed on the vibrancy of the labor market. The labor market's normalization, combined with the prevalence of remote work and investment in labor-saving technologies since the pandemic, appear to have boosted the run rate of productivity growth in recent years.

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