One lesson from the 2007–2009 Global Financial Crisis is that one should be cautious about declaring “the fundamentals of our economy are strong” during a period of market mayhem. That said, there are lots of good things happening in the American economy despite the current tumult. 

Case in point: labor productivity growth. Recent data suggests that an acceleration might be underway (which aligns with my optimistic expectations). The Commerce Department’s latest report, released last week, brings encouraging news on this front. Nonfarm productivity, measured as output per hour, grew at an annual rate of 2.3 percent in the second quarter and has increased by 2.7 percent over the past year. Notably, four out of the past five quarters have shown robust growth. 

Keep in mind that productivity growth from 2005 to 2019 averaged 1.5 percent, lower than the post-war average of 2.2 percent. This slowdown followed a period of rapid growth (3.2 percent from 1996 to 2004) driven by the dot-com boom and IT advancements.

So what’s been driving the recent upturn (one Europe is certainly jealous of)? “Post-pandemic Productivity Dynamics in the United States,” a recent International Monetary Fund analysis by researchers Mai Chi Dao and Josef Platzer takes a crack at answering that question. From the working paper (which also provided the aforementioned historical data):

Leaving behind the pandemic and early re-opening phase, the US economy has shown encouraging rates of productivity growth since late 2022 that have lifted labor productivity to more than 6 percent above the pre-pandemic level by the first quarter of 2024. During this period, the US economy has also staged an impressive expansion against the background of rapid disinflation, suggesting that productivity growth and other supply-side tailwinds have likely been supporting strong growth in domestic demand. The surge in productivity also distinguishes the recovery in the US relative to other advanced economies, most notably the euro area, where flagging productivity has often been identified as a drag on growth potential.

So what’s going on? Not a generative AI story, at least not yet. Instead, these seem to be the driving forces:

• Strong productivity growth in high-skill and IT-intensive industries, sectors that were already experiencing faster productivity growth before the pandemic. Indeed, productivity growth was strong in 2019, up 2.2 percent.
• Industries with higher levels of investment in digital technologies also showed higher average productivity growth. This trend was present before the pandemic but accelerated afterward, particularly in sectors that could easily adapt to remote work.
• Increased labor market dynamism—workers switching jobs more frequently after the pandemic shock—was strongly associated with higher productivity growth. This effect was observed both across different industries and over time within industries. Why would this matter? Job churn can boost productivity by allowing for better matching between workers and jobs.

So is what we’re seeing just a mere boomlet or something more? Again from the paper:

How long can the higher rate of productivity growth be sustained? On the one hand, investment in [intellectual property products] may slow down, and rates of worker churn have already normalized to a great extent, both suggesting that the recent high rate of productivity growth may not continue for much longer. On the other hand, new technologies (AI) and continued high rates of new business formation may provide a new impulse for productivity growth, especially once interest rates come down and financial conditions for start-ups become more favorable.

In other words, tech progress and entrepreneurs are the key to our productivity future—a classic American economic story. 

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