Dive Brief:
- U.S. labor productivity rebounded last year from a record downturn in 2022, reinforcing profit margins, slowing inflation and validating CFO efforts to boost efficiency.
- Nonfarm employee output per hour increased 3.2% on an annualized basis during the fourth quarter after surging 4.9% during Q3, the Bureau of Labor Statistics said Thursday. Still, the economy-wide efficiency gains may not last, Federal Reserve Chair Jerome Powell said Wednesday during a press conference.
- “My guess is we may shake out and be back where we were” before the pandemic, Powell said, noting that productivity data has whipsawed since the onset of COVID-19 in 2020. The work-from-home trend may do little to improve productivity, and efficiency gains from generative artificial intelligence may only appear “in the longer run,” he said.
Dive Insight:
The productivity resurgence may have helped spur economic growth and curb inflation last year, Powell said. U.S. gross domestic product growth defied predictions of recession, rising at an annual rate of 4.9% during Q3 and 3.3% during Q4.
Higher borrowing costs and forecasts of weaker growth by both private- and public-sector economists — including those at the Fed — have compelled companies to streamline, according to Noah Yosif, chief economist at the American Staffing Association.
“Tightening economic conditions have forced companies to do more with less,” Yosif said Thursday in an email response to questions.
“With an expected elongation in interest rate cuts extending into 2025, capital costs will remain high, which will weigh on future staffing decisions,” he said. Also, “competition for workers remains tight, with fewer layoffs and lower quits, affording job seekers with ample opportunities.”
Fed policymakers on Wednesday said they need more time — and data — to affirm that they have subdued inflation sufficiently to begin cutting the federal funds rate from the highest level in 23 years. Productivity gains that last longer than Powell anticipates and ease price pressures may help prompt a Fed easing.
Generative AI will likely help fuel strong productivity growth, according to Alex Shvarts, CEO of FundKite, a fintech company focusing on small businesses.
“Few companies can create the infrastructure required for massive generative AI models,” Shvarts said Thursday in an email response to questions. “However, I think we’re seeing companies take an approach that breaks down specific parts of their business and applies case-specific AI models, leading to a bump in productivity overall.”
Companies use AI to eliminate repetitive tasks, speed decision making and sharpen risk analysis, he said. “Narrowing the focus of each use case has enabled companies to make significant improvements in productivity in staffing, modeling and data analysis.”
AI and other technologies also enable companies to shift employees “to key areas of the business, where AI may not be fully ready to deploy,” Shvarts said.
Automation has helped companies hold down labor costs. Hourly compensation costs rose 3.7% last quarter, little changed compared with Q3, the Bureau of Labor Statistics said.
Price pressures from wages are falling despite solid hiring and an unusually low jobless rate. The employment cost index during the fourth quarter rose just 0.9%, less than expected in the smallest increase since 2019, the Labor Department reported Wednesday.
