US productivity is rising and it risks warping monetary policy

America's neutral rate ought to be going up but will the Fed listen?

- JONATHAN LEVIN

The US economy seems to be in the throes of one of its biggest bursts of productivity in decades, weighing on business labour costs and hastening disinflation.

If artificial intelligence (AI) is partly the reason for the gains, then it's plausible that we're in the early days of durable improvements to efficiency. And yet, the numbers are also shrouded in mystery and the US Federal Reserve should greet them caution rather than as a green light to keep lowering interest rates.

American labour productivity, or non-farm employee output per hour, increased at a 4.9% annualized rate in the third quarter, the strongest since 2023, according to the Bureau of Labor Statistics. Excluding the bounce-back quarters around recessions, it was the second-strongest reading in two decades. Meanwhile, unit labour costs plunged for a second consecutive quarter, dropping 1.9% after declining 2.9% in the April through June period. Taking them at face value, rising productivity and lower costs are worthy of celebration.