Lost among yesterday’s trade deal news was an announcement that sent shivers down economists’ spines: The backbone of US economic growth for the last three years is beginning to break.
Worker productivity is the difference between the amount of goods and services that workers produce versus how many hours they work. In other words, it measures how efficiently US workers can create products—and the metric sank last quarter for the first time since 2022, the Bureau of Labor Statistics revealed.
US labor productivity fell 0.8% year over year in Q1, lower than the 0.7% analysts expected, and a steep decline from the 1.7% growth rate in Q4. For context, productivity grew 2.8% in 2024 overall.
The culprits were a 0.3% drop in output combined with a 0.6% increase in hours worked. That’s why unit labor costs, which measure how much employees are paid to produce one unit of any given product, rose 5.7% last quarter—higher than the 4.8% expected, and a huge jump from 2% in Q4.
What does this all mean?
We won’t lie—the numbers look bad. When worker productivity rises, the economy gets stronger. When you get a lower output from more hours worked, coupled with higher expenses to produce goods and services—like we did this quarter—that can indicate some serious economic issues.
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But some economists think these numbers aren’t nearly as bad as they seem. Their reasoning is that the data has been somewhat distorted by the surge in imports since the end of Q4.
“The productivity black eye reflects disruptions to net exports caused by the imposition of tariffs and heightened policy uncertainty rather than genuine weakness in output,” explained EY Chief Economist Gregory Daco. He pointed out that manufacturing productivity rose by 4.5% in Q1, due to a 5.1% increase in manufacturing sector output and only a 0.5% increase in hours worked, going against the narrative the headline numbers suggest.
But a broader economic slowdown is still expected, given tariff confusion is not likely to dissipate anytime soon. “Swings in both output and employment as the tariff shock works its way through the economy probably will make the productivity data harder to read over the rest of this year, but we generally expect the underlying rate of growth to slow somewhat,” wrote senior U.S. Economist for Pantheon Macroeconomics Oliver Allen in a note yesterday.
So, if you didn’t have a very productive week at the office, you’re not the only one.—LB