Gains in productivity, key to U.S. economic growth, may soon start to ebb. Hopes that AI will come to the rescue look misplaced. By Megan Leonhardt and Adam Levine
U.S. labor productivity growth has been on the rise in recent years, gaining an average of 2.2% a quarter since 2023 due to public and private investments, new business formation, and surging immigration. These forces are now waning, however, adding to the challenges facing the U.S. economy.
Many economists and investors expect AI to come to the rescue, ushering in a productivity boom in the next few years that will lift gross domestic product and bolster U.S. competitiveness. But it may not come soon enough.
Although companies are spending hundreds of billions of dollars in a race to fully capture the benefits of artificial intelligence, the history of technological advancements argues for caution in estimating how quickly and effectively this investment will pay off. If the anticipated AI-driven productivity gains fail to materialize in the next couple of years, the U.S. could face more inflation, labor challenges, and reduced economic activity.
Why Productivity Matters
Labor productivity is the measure of how efficiently workers generate goods and services. As productivity rises, businesses typically need fewer employees to produce the same amount of goods or services. Thus, productivity gains can drive economic growth and help to alleviate inflationary pressures.
They can also lift living standards. If the U.S. achieves an annual productivity growth rate of 2%, living standards can double every 35 years, according to John Ryding, chief economic advisor at Brean Capital. But if growth accelerates to around 3%, as happened from 1995 to 2005, that allows for a doubling every 23 years. Conversely, if productivity growth slows to just 1%, living standards would double every 69 years.
U.S. productivity has grown by an average of 2% annually since 1960, although growth slowed to just 1.2% a year in the 2010s. Since 2023, however, labor productivity gains have been pacing at nearly twice that rate on a quarterly basis, and they grew at a 3.3% rate in this year's second quarter.
The recent gains in productivity have been driven by investment, changing labor-market dynamics, and business dynamism, rather than the direct effects of AI. Industries such as hospitality and mining have been among the biggest gainers. Productivity at restaurants, for example, surged more than 15% during the Covid pandemic. Restaurants saw a wave of new business from delivery, but had trouble hiring, so output went up quickly without the complementary rise in labor.
"The bulk of the postpandemic productivity outperformance has been driven by higher services productivity," says Goldman Sachs Research economist Manuel Abecasis.
Yet the U.S. has now wrung out the majority of the productivity gains achieved through Covid-era business upgrades and workforce dynamics, while the most recent drivers of productivity growth, including full employment, fixed investment, and supply-side stability, are ebbing. As a result, the U.S. economy is approaching a potential inflection point: The factors that returned the economy to a roughly 2% annual productivity growth trend may not persist for much longer.
"With labor-force growth slowing due to demographics, the U.S. economy is increasingly reliant on productivity gains to drive growth and improve living standards," says Adam Schickling, senior economist at Vanguard.
AI adoption has had a minimal impact on labor and productivity chiefly because it is still in the early stages. Only about 10% of businesses used any form of AI -- including machine learning, natural language processing, virtual agents, and voice recognition -- to produce goods or services in September, according to the Census Bureau's Business Trends and Outlook Survey. Still, that is up from 3.7% in September 2023.
Other surveys, including one conducted by the Federal Reserve Bank of New York in September and another by ADP in October, put regular usage of AI by businesses and workers at much higher levels. But the technology isn't in "regular use" by the majority of American companies, and may take years to generate substantial economic dividends.
Economists have written extensively about productivity gains from technological innovation. Indeed, Joel Mokyr, Philippe Aghion, and Peter Howitt won this year's Nobel Prize in Economic Sciences for establishing the theoretical underpinnings of this dynamic.
Stanford economist Erik Brynjolfsson has also been a leading thinker on the subject. As personal computer use mushroomed in the 1980s and '90s, a mystery unfolded: Where was the productivity growth that so many anticipated? From 1977, when the Apple II computer was released, to 1989, when Brynjolfsson began writing about the "productivity paradox," U.S. productivity grew by a meager 1.3% annually, even as PC prices plummeted and sales rose.
"You can see the computer age everywhere but in the productivity statistics," Robert Solow, a Nobel laureate in economics, said in 1987.
But that changed in the mid-1990s, and U.S. productivity grew by 3% a year over the following decade . To address the lag between deployment and productivity gains, Brynjolfsson developed what he called the productivity J-curve, which charts the path of productivity growth following the introduction of a new technology.
Technological innovations like AI can reduce productivity growth at first, before the benefits accrue years or even decades later. Electric motors were first used in factories in the 1880s, but the productivity benefits didn't accrue until 30 years later.
"Technology by itself rarely delivers productivity just when you plug it in," Brynjolfsson told Barron's. "What almost always has to happen is that you have to rethink your business processes. You need to reskill your workforce. You may need to develop new products and services. All this reinvention and co-invention adds a ton of value, but it also takes time."
Economic Implications
The U.S. is still a few years away from substantial commercial adoption of AI, and perhaps even further away from the promised benefits. Meanwhile, the Congressional Budget Office projects that annual productivity gains will need to average at least 1.4% over the next decade for the U.S. economy to grow by 2% a year. But productivity growth may not achieve that pace, given labor trends and the delayed boost from AI adoption.
Goldman Sachs Research estimates that labor-force growth will contribute just 0.3 percentage point to potential gross domestic product growth over the next few years, given an aging U.S. population and immigration curbs on worker supply. That is down from 0.8 percentage point since 2019.
Consumer spending, which accounts for a majority of GDP growth, is also expected to slow from recent highs. Personal consumption expenditures rose by 2.9% in 2024, but the National Association of Business Economics' November consensus forecast was for just 2.5% growth in 2025 and 1.8% in 2026.
That leaves productivity growth to do the heavy lifting. Yet the Congressional Budget Office projects that annual productivity gains will average just 1.3% through the end of the decade. As a result, most economists expect U.S. GDP growth to fall in coming years below the 2% rate considered healthy for advanced economies. Economists surveyed by FactSet expect the economy to grow by 1.8% in 2026 and 1.9% in 2027.
Slowing productivity growth, together with growing government obligations, could force policymakers to make difficult decisions around taxation, public spending, and entitlement outlays, Vanguard's Schickling says.
"If we're not getting labor growth and productivity gains, the risk of a recession rises," says Gerald Cohen, chief economist at the Frank H. Kenan Institute of Private Enterprise and a professor at the University of North Carolina at Chapel Hill.
There is little doubt that the U.S. is in the early stages of the AI boom. But it is unlikely that this emerging technology will be able to reverse sagging productivity trends soon.
Write to Megan Leonhardt at megan.leonhardt@barrons.com and Adam Levine at adam.levine@barrons.com
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(END) Dow Jones Newswires
December 05, 2025 21:30 ET (02:30 GMT)
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