U.S. labor productivity accelerated sharply in the third quarter of 2025, rising at a 4.9 percent annual rate as workers contributed more output per hour worked, the Bureau of Labor Statistics reported Thursday.
The figure substantially exceeded economist expectations of 3.6 percent and marked the strongest quarterly gain in two years. Combined with an upwardly revised 4.1 percent increase in the second quarter, the back-to-back performance suggests American businesses are adapting to tighter labor markets by investing in efficiency rather than pursuing the low-cost labor strategies that dominated much of the past two decades.
“We’re starting the see the effects of the president’s policies kick-in,” Joe Lavorgna, counselor to the Treasury Secretary, said in an interview with Breitbart News after the numbers were released. “These data points that we’re seeing at the end of 2025 set us up with strong momentum going in to 2026.”
Lavorgna argued that the improved productivity would allow the Federal Reserve to more aggressively cut interest rates this year. “The Trumpian productivity surge should allow interest rates to decline,” he said.
The data indicate a fundamental shift in corporate behavior. Businesses increased output by 5.4 percent while hours worked rose just 0.5 percent, indicating the companies were able to get more from existing workers rather than expanding headcount or hours worked.
Unit labor costs—the amount businesses pay workers to produce each unit of output—fell 1.9 percent in the third quarter. That marked the first back-to-back decline in these costs since 2019, even as hourly compensation rose 2.9 percent.
The decline in unit costs occurred because productivity gains more than offset wage increases, a pattern that reduces inflationary pressure on the economy. This undermines claims by some economists that Trump’s immigration policies would create a wage-price spiral that would push up inflation.
Over the past four quarters, productivity has risen 1.9 percent while unit labor costs increased just 1.2 percent—well below the pace typically associated with problematic inflation.
It also indicates that critics of tariffs were wrong when they claimed that the Trump administration’s trade policies would make the U.S. economy less efficient.
The shift from labor-intensive to productivity-focused operations appeared even more pronounced in manufacturing, where output rose 2.6 percent while hours worked fell 0.7 percent.
In durable goods manufacturing, the pattern was starker still: output increased 3.0 percent as hours worked declined 1.7 percent. That 4.7% productivity gain in durables suggests companies are producing more with substantially fewer workers—an outcome that would be difficult without significant investment in automation, training, or process improvements.
Total manufacturing productivity rose 2.3 percent compared to a year earlier, the strongest four-quarter gain since the second quarter of 2021, when the economy was rebounding from the pandemic.
The BLS also revised its estimates of productivity growth throughout the current business cycle, which began in the fourth quarter of 2019. The new data shows productivity has grown at a 2.0 percent annualized rate during this period, up from the previously published 1.8 percent.
That revision brings the current cycle’s performance much closer to the long-term historical average of 2.1 percent since 1947, and substantially above the disappointing 1.5 percent rate that prevailed during the 2007-2019 cycle. That cycle was characterized by high levels of offshoring, rising imports, and immigration driven labor force growth.
The improvement suggests the productivity slowdown that characterized much of the 2000s and 2010s may be ending.
The productivity surge coincides with a period of constrained labor supply following immigration policy reforms. Recent job openings data from the Labor Department showed businesses pulled back on hiring in November, even as layoffs remained near historic lows, suggesting companies are holding onto existing workers while abandoning searches for new hires they cannot easily fill.
Hours worked in the overall nonfarm business sector have risen just 0.9 percent over the past year, far below the pace seen during previous expansions when businesses could more readily add workers.
That labor constraint appears to be driving a return to productivity-enhancing capital investment. When businesses cannot simply hire more workers at competitive wages, they face pressure to invest in technology, equipment, and training that allows existing employees to produce more.
Recent data on capital goods orders provides concrete evidence that businesses are shifting resources from labor to equipment. Core capital goods new orders—nondefense orders excluding aircraft, a gauge of business investment—rose 3.1 percent in the year through October compared to the same period in 2024, according to Census Bureau data released in late December.
The acceleration in equipment orders spans categories directly tied to productivity enhancement. New orders for computers and electronic products increased 3.8 percent over the year, while machinery orders rose 4.2 percent and electrical equipment orders climbed 4.9 percent.
The timeline suggests a clear causal chain: as labor markets tightened through 2024 and into 2025, businesses accelerated orders for productivity-enhancing equipment. That equipment is now being installed and contributing to the productivity gains visible in third-quarter data.
This represents a reversal from the pattern that dominated from roughly 2005 to 2019, when abundant labor from immigration and the threat of offshoring allowed companies to maintain productivity growth at historically low levels while relying on labor quantity rather than quality. During that period, average productivity growth of just 1.5 percent reflected minimal incentive to invest in efficiency when adding workers remained the easier path.
The BLS revised second-quarter productivity up significantly from the preliminary estimate of 3.3 percent to a final reading of 4.1 percent. More dramatically, second-quarter unit labor costs were revised down from a 1.0 percent increase to a 2.9 percent decrease—a swing of nearly four percentage points that suggests the underlying trend is even stronger than initially reported.
The consecutive strong quarters in mid-2025 follow a weak first quarter when productivity fell 2.1 percent and unit labor costs surged 7.3 percent at the tail end of the Biden administration. That volatility is typical in quarterly data, but the trend over multiple quarters now points clearly toward sustained productivity acceleration.
The productivity gains carry significant implications for the economy’s inflation outlook. The Federal Reserve closely monitors unit labor costs as an indicator of wage-driven price pressures. With these costs now declining, the data removes a potential concern that could have complicated the Fed’s policy decisions.
The figures also suggest the economy may be capable of sustaining higher levels of output growth without generating inflation, since businesses are producing more from each hour of work rather than simply adding expensive labor inputs.
The government will release December employment data on Friday, providing additional insight into whether the labor market dynamics driving productivity gains are continuing into the final months of 2025.