Productivity has been heralded in recent years, as the U.S. has seen an uptick in labor efficiency gains. The Federal Reserve has now joined the productivity chorus, embracing the metric as one determinant in setting the path for monetary policy. But Fed officials may be expressing too much optimism, too soon.
Robust productivity growth is often seen as a "silver bullet" in economies because it helps lift living standards and economic output without adding inflationary pressures. In an era of slowing U.S. population growth, productivity growth is increasingly necessary to maintain the nation's future economic success.
The Fed heralded strong productivity growth in the statement it released on Wednesday after July's Federal Open Market Committee meeting. Under Chairman Kevin Warsh, the Fed not only noted such growth in both its June and July statements, but also characterized it as "strong."
And, in his remarks at Wednesday's postmeeting news conference, Warsh highlighted the potential for strong artificial-intelligence-related capital investment to continue to lift productivity in the coming months and years. "Capex is preparing the ground for future growth," he said.
Warsh has prioritized data collection and analysis regarding productivity since taking the reins of the Fed in May. One of the five task forces he has formed is focused on productivity and jobs, with the goal of assessing the economic impact of new general-purpose technologies, including AI. He reiterated on Wednesday that he believes productivity is one of the "big questions" that policymakers will need to grapple with when setting monetary policy. "What's really happening with productivity?" Warsh asked.
The problem with this focus on strong productivity is that while the gains have been good, they have been slowing over the past year. Moreover, the latest data don't indicate that the U.S. economy has entered a sustained period of high productivity, at least not yet.
This isn't the first time the Fed has cited strong productivity growth in its policy statement, but the last time was more than 20 years ago, when Alan Greenspan chaired the central bank. From 2002 to 2005, labor productivity growth averaged 3.3% annually, a rate worth crowing about.
The U.S. is hardly experiencing Greenspan-era levels of productivity growth today. Nonfarm business-sector labor productivity increased by just 0.3% in the first quarter of 2026, according to the Bureau of Labor Statistics, which releases the data on a quarterly basis.
Last year, average annual labor productivity slowed to 2.3% from 2024's average annual pace of 2.9%. Labor productivity rose 2.1% in this year's first quarter on an annualized basis. To be sure, this compares with a 1.5% annual average gain from the end of 2007 through 2019, according to the BLS data.
The BLS will report the change in second-quarter productivity on Aug. 6. Economists expect that productivity grew by just 0.9% in the quarter.
The recent gains in productivity have been driven by capital expenditure, changing labor-market dynamics, and business dynamism, rather than the direct effects of AI.
Labor productivity is the measure of how quickly and efficiently workers generate goods and services. The BLS calculates it as total gross domestic product growth, or real output, divided by the number of hours worked. Although output increased by 1% in the first quarter, hours worked increased by nearly as much.
Total factor productivity growth, another measure of productivity gains that also includes growth in capital, has been even more modest recently. Neither the Fed's statement nor Warsh defined which data set the Fed is referring to.
Private nonfarm business-sector total factor productivity, measured annually, increased 0.8% in 2025. During this year's first quarter, it declined by 0.33%, compared with the prior quarter, according to the latest estimate from the San Francisco Fed.
AI potentially could lift productivity growth and provide a boost to the economy, although there has been ample debate about its ultimate impact. But it seems premature for the Fed to hail strong product productivity growth as a critical driver of economic conditions.
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