U.S. labor productivity surged in the third quarter at its fastest pace in two years, offering fresh evidence that efficiency gains are helping keep inflation in check even as wages remain a key concern for policymakers and businesses alike.
New data underscore a picture of an economy that continues to grow at a solid clip while the labor market shows signs of cooling.
According to figures released Thursday by the Bureau of Labor Statistics, productivity — measured as nonfarm employee output per hour — jumped at a 4.9% annualized rate in the third quarter.
That followed an upwardly revised 4.1% increase in the second quarter, marking a strong rebound in worker efficiency. The acceleration in productivity comes as overall U.S. economic growth powered ahead in the third quarter at the fastest pace seen in two years, even as hiring momentum slowed.
At the same time, the cost of labor moved in the opposite direction. Unit labor costs, which reflect what businesses pay workers to produce a single unit of output, declined by 1.9% in the third quarter after also falling in the previous quarter.
This marked the first time since 2019 that unit labor costs have posted back-to-back declines, a development likely to be welcomed by employers facing persistent cost pressures in recent years.
The drop in employment costs points to what economists describe as a bifurcated economy. On one hand, growth remains solid, bolstered by strong productivity gains. On the other, the labor market has softened, reducing some of the upward pressure on wages that has concerned inflation watchers.
Experts are stunned as U.S. economic productivity surges 4.9%, marking its highest level in nearly six years. pic.twitter.com/fcqDSH02yj
— Breaking911 (@Breaking911) January 8, 2026
Additional data released Thursday showed that initial claims for unemployment insurance rose by 8,000 to 208,000 in the week ended Jan. 3, a period that included the New Year’s Day holiday. Continuing claims, which serve as a proxy for the number of people receiving unemployment benefits, increased to 1.91 million in the prior week. These figures have been volatile in recent weeks, which is typical for this time of year.
Beyond easing labor costs, the resurgence in productivity seen in mid-2025 suggests that companies are adjusting to broader economic challenges by becoming more efficient.
Businesses appear to be using technology to operate with leaner staffing levels, helping them absorb higher costs elsewhere while maintaining output. The productivity gains also hint at how firms are adapting to changes in the global trade environment by finding internal efficiencies rather than simply passing costs on to consumers.
For Federal Reserve officials, continued improvements in productivity offer some reassurance. Labor costs represent the largest expense for many businesses, and rising efficiency helps limit wage-driven inflationary pressures. As the job market has shifted into a lower gear, economists largely expect wage growth to cool further, reinforcing the disinflationary trend.
Taken together, the latest data paint a picture of an economy that is not only growing, but growing more efficient. While challenges remain, the combination of strong productivity, moderating labor costs, and easing wage pressures suggests the U.S. economy is finding ways to expand without reigniting the inflation surge that dominated recent years.
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