U.S. second-quarter productivity growth exceeded expectations, and unit labor costs were lower than anticipated, easing inflation pressures.

The data released by the U.S. Bureau of Labor Statistics on Thursday showed that the growth rate of labor productivity in the United States in the second quarter exceeded market expectations. Against the backdrop of companies increasingly investing in artificial intelligence (AI) and technology, as well as striving to cope with rising costs, corporate productivity further improved. Meanwhile, the increase in unit labor costs was lower than expected, providing a positive signal for the Federal Reserve's efforts to control inflation. The data indicated that nonfarm business labor productivity (i.e., output per hour) in the U.S. grew at an annualized rate of 1.4% in the second quarter, exceeding general market expectations and accelerating further from the revised 0.8% in the first quarter. Notably, the productivity growth in the first quarter was revised up by 0.5 percentage points from previously published figures. At the same time, unit labor costs in the second quarter rose at an annualized rate of 1.3%, lower than market expectations, and consistent with the revised figure of 1.3% in the first quarter, demonstrating that companies effectively alleviated cost pressures through efficiency improvements amidst wage growth. The improvement in productivity was primarily driven by a significant acceleration in output growth and sustained increases in corporate efficiency. In terms of specific components, the improvement in labor productivity in the U.S. in the second quarter was mainly attributed to a noticeable acceleration in corporate output growth. The data showed that the actual output of nonfarm businesses grew at an annualized rate of 1.7% in the second quarter, while total hours worked only increased by 0.3%. As the output growth significantly outpaced hours worked, labor productivity saw further enhancement. Year-on-year, nonfarm business labor productivity in the U.S. increased by 2.2% in the second quarter. The U.S. Bureau of Labor Statistics indicated that the productivity gains this quarter reflected companies achieving higher output efficiency while maintaining a low rate of employment growth. Notably, the output growth in the second quarter reached its fastest pace since the third quarter of 2025. Since the onset of this economic cycle in the fourth quarter of 2019, the annualized growth rate of nonfarm business labor productivity in the U.S. has reached 2.1%, higher than the 1.5% observed during the previous economic cycle from 2007 to 2019, and consistent with the long-term average of 2.1% since 1947. The effects of AI investment are still under observation, and officials have stated that it is currently difficult to draw conclusions. In recent years, the Federal Reserve, economists, and investors have closely monitored whether the hundreds of billions of dollars in AI investments by companies have begun to improvements in labor productivity. At present, U.S. companies, including large tech firms, are continuing to ramp up investment in AI infrastructure, with rapid growth in capital expenditure on data centers, GPUs, storage chips, and related sectors, leading to widespread expectations that AI could drive a new wave of productivity revolution. However, current official data does not provide a clear conclusion regarding the overall contribution of AI to productivity enhancement. The U.S. Bureau of Labor Statistics pointed out that labor productivity data is subject to significant quarterly fluctuations, and the long-term effects of AI investment still require more time for assessment. Meanwhile, AI investments have already fueled the construction of data centers, driving rapid growth in demand for storage chips, servers, and other tech hardware, as well as pushing up prices for related products. Additionally, the situation in the Middle East has led to rising energy and transportation costs, which continue to erode real income for households. The moderate growth in unit labor costs helps relieve inflationary pressures. For the Federal Reserve, one of the most significant implications of productivity improvements is their potential to help mitigate inflationary pressures resulting from rising wages. Data shows that unit labor costs in the U.S. only increased by 1.3% in the second quarter, primarily due to a 2.7% rise in hourly earnings and a 1.4% increase in labor productivity. As labor productivity improved in tandem, the growth of labor costs per unit of output was notably restrained. Over the past four quarters, U.S. unit labor costs have accumulated a total increase of 1.4%. The U.S. Bureau of Labor Statistics noted that unit labor costs are essentially equal to the ratio of hourly wages to labor productivity, which means that wage increases typically drive up unit labor costs, while productivity increases help reduce this metric. However, after adjusting for inflation, real hourly earnings in the U.S. declined by an annualized rate of 3.1% in the second quarter, marking the largest drop since the end of 2022, with a cumulative decline of 0.1% over the past four quarters. Moreover, the proportion of labor compensation in total business output fell to 52.9%, the lowest level recorded since data collection began in 1947, indicating that the share of corporate profits has further increased while the share of labor income in GDP continues to decline. Manufacturing productivity improved in sync, with stronger performance in the durable goods sector. Apart from the overall nonfarm sector, U.S. manufacturing productivity also showed improvement in the second quarter. The data revealed that manufacturing labor productivity grew by 1.9%, with manufacturing output increasing by 4.6%, while total hours worked rose by 2.6%. Specifically, productivity in the durable goods manufacturing sector grew by 2.7% and output climbed by 7.3%; non-durable goods manufacturing productivity increased by 2.0%, primarily driven by a 0.5% decline in hours worked. Year-on-year, overall manufacturing labor productivity increased by 0.9%. Simultaneously, unit labor costs in manufacturing remained roughly flat in the second quarter, as the 1.9% increase in wages was completely offset by a corresponding rise in productivity. However, unit labor costs in manufacturing have still accumulated a total increase of 3.5% over the past year. The U.S. Bureau of Labor Statistics noted that since the start of this economic cycle (from the end of 2019 to now), the annualized growth rate of manufacturing labor productivity has been 0.5%, significantly higher than the 0.1% during the previous economic cycle, but still below the long-term average of 2.1% since 1987. Waller: AI will ultimately become an important force in long-term inflation suppression. Federal Reserve Chair Waller has publicly expressed confidence that artificial intelligence will ultimately help alleviate long-term inflationary pressures. During a Senate hearing on July 15, he stated, "I believe that over time, productivity improvements will lead to deflationary effects structurally. I think any field touched by technology will ultimately become cheaper." However, some economists have cautioned that if AI continues to improve corporate efficiency, some firms may subsequently slow down hiring or even reduce their workforce, posing new challenges to the labor market. Therefore, how AI will reshape the U.S. labor market still requires further verification through additional data in the future.