Over the past several decades, U.S. labor productivity (output per hour worked) has generally trended upward, shaped by technological advancements, economic cycles, and sector-specific dynamics. From 2000 to 2010, productivity grew at an annual rate of 1.7%, driven largely by the 1990s tech boom and innovations in information technology. However, the following decade experienced a slowdown, with growth decelerating to 1.3% annually due to the lingering effects of the Great Recession and slower technological progress. Looking ahead, as we are at the cusp of another major AI-led tech cycle, further U.S. productivity gains could help shield profit margins and thus cushion the profit cycle, even if the economy witnesses a soft landing or a brief shallow recession in early 2025.
Recent years have shown signs of renewed momentum, with labor productivity rising above 2% annually, reflecting the influence of AI and the delayed benefits of investments in digital technology and automation made during the pandemic. Hybrid or working from home (WFH) trends have also structurally reduced real estate costs for corporations. The second quarter of 2024 highlighted this productivity rebound, with a 2.3% quarter-over-quarter increase, which brought year-over-year productivity growth to 2.7%, a solid pace compared to the 1.6% annualized growth seen from 2015 to 2019.
This resurgence in productivity has also moderated unit labor costs, which grew by just 0.9% in the second quarter after a sharper increase in unit labor costs earlier in the year. The year-over-year growth in unit labor costs is now at 0.5%, the lowest level since late 2019, helping to soften inflationary pressures despite elevated nominal wage growth. This matters for business profit margins as labor costs account for approximately 65% of total business costs on average.
In conclusion, the recent acceleration in U.S. productivity offers a promising long-term profit margin outlook which could help cushion profit cycle downturns. Even though the business cycle may not be eliminated, more resilient profit margins could contribute to shallower recessionary periods as businesses may simply not need to lay off as many workers. From an investment perspective, shallower recessions would suggest tamer increases in risk aversion as the economic and earnings recoveries will be quicker.
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