U.S. productivity growth revised down as labor costs rise

WASHINGTON (Reuters) – U.S. worker productivity growth slowed more than initially thought in the fourth quarter, but the trend remained solid and could get a boost from the rapid adoption of artificial intelligence by businesses.

The sharp downgrade to productivity last quarter, reported by the Labor Department on Tuesday, pushed unit labor costs sharply higher amid strong increases in labor compensation.

Though economists viewed the surge in costs as temporary, given labor-market softness, they said the pace was incompatible with a return of inflation to the Federal Reserve‘s 2% target.

“Fortunately, from a profitability perspective, productivity gains absorbed much of this increase,” said John Ryding, chief economic advisor at Brean Capital. “However, if this pace of unit labor cost increases persists, it is too fast to be consistent with 2% inflation over time and stable profit margins.”

Nonfarm productivity, which measures hourly output per worker, increased at a downwardly revised 1.8% annualized rate last quarter, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had expected productivity growth to be revised down to a 2.0% rate from the previously reported 2.8% pace.

Productivity grew at a 2.5% rate year over year. Third-quarter productivity grew at an unrevised 5.2% rate. Productivity increased 2.1% in 2025. It has grown at a 2.1% rate since the fourth quarter of 2019.

The report was delayed by last year’s government shutdown.

The downward revisions to quarterly productivity were telegraphed by a sharp downgrade in fourth-quarter gross domestic product growth to a 0.7% rate from the initially estimated 1.4% pace.

Economists believe the adoption of AI will boost productivity and rein in labor costs.

Unit labor costs – the price of labor per single unit of output – increased at a 4.4% rate last quarter. That figure was revised up from the initially estimated 2.8% pace.

Economists had forecast growth in unit labor costs would be revised up to a 3.5% rate. They grew at a 2.4% rate from a year ago. Growth in unit labor costs for the third quarter was revised down to a 1.0% pace from a 1.8% rate. Unit labor costs increased 2.3% in 2025.

Hourly compensation increased at a 6.3% rate last quarter, revised up from the previously estimated 5.7% pace. Growth in hourly compensation in the third quarter was upgraded to a 6.2% pace from a 3.3% rate. Hourly compensation increased 5.0% from a year ago and grew 4.5% in 2025.

“Strong productivity growth alongside stable or declining wage growth means the labor market won’t be a source of inflationary pressures in the near term,” said Matthew Martin, senior U.S. economist at Oxford Economics.

(Reporting by Lucia Mutikani; Editing by Paul Simao)