U.S. Productivity Jumped 3.6% Last Quarter — and AI May Be Why

By Nathan Brooks

U.S. productivity rose an estimated 3.6% from July to September, the government reported Thursday — the largest increase in a year and the latest sign that something structural has shifted in the American economy since the pandemic.

The quarterly number isn't a one-off. Over the 12 months that ended in October, productivity advanced at a 2.1% rate, almost double the average annual gain from 2010 to 2019. For practitioners, that's the difference between an economy that grinds and one that compounds.

Why productivity is the whole ballgame

Productivity simply means workers producing more goods and services in the same amount of time. When it climbs, businesses can sell more, book higher profits, and potentially hand out better pay and benefits.

Long-run economic growth has two engines: a growing population and rising productivity. The first one is stalling. A lower birth rate, the deaths of more than 2 million baby boomers each year, and reduced — or outright declining — immigration mean the U.S. population may no longer be growing at all.

That leaves productivity, as the saying goes, as the only game in town.

What's driving the gains?

Economists don't fully agree, but the sources are hard to miss:

• A surge in business investment in new technologies and processes since the pandemic.
• Heavy spending on remote-work infrastructure and labor-saving equipment during the acute labor shortage.
• The AI boom: businesses began investing heavily in machine learning around 2022, and spending has soared since. This year could see the biggest splurge ever.

The attribution question is where the debate gets sharp. "Maybe AI is contributing to this, but our view is only on the margin," said Oren Klachkin, financial markets economist at Nationwide. "It's more the result of businesses consistently looking for ways to do more with less to squeeze out efficiency gains and keep costs down."

Gad Levanon, chief economist at the labor-research firm Burning Glass Institute, takes the other side. He argues AI is playing an increasing role in rising productivity, even if it's hard to prove — because the increase is difficult to explain otherwise.

What does this change for growth forecasts?

Here's the practical payoff. Just a few years ago, economists widely believed the fastest the U.S. economy could grow over a sustained period was around 1.8% a year — historically weak. Now many think it can expand at 2.3% to 2.5% annually at least until the end of the decade. That normally means more jobs, higher pay and a rising stock market for the Dow DJIA and S&P 500 SPX.

The recent data backs the upgrade. Gross domestic product grew at a stunning 3.4% annual rate in the third quarter despite high inflation and other obstacles. GDP is also on track to expand at roughly 2.5% in 2026, following gains of 2.3% in 2025, 3% in 2024 and 2.9% in 2023 — four straight years near or above the old speed limit.

The expectation, whichever economist you side with, is that productivity keeps rising as businesses learn to adopt AI in ways that actually fit their operations.

The caveats worth tracking

The AI revolution is still in its early stages, and it's not clear yet how much it will really help — or who the big losers will be. Americans have grown increasingly worried about exactly that. They suspect AI might cost lots of jobs, and political resistance is rising to the data centers crucial to AI development, which consume large amounts of water and electricity and have sparked concerns about bigger consumer utility bills.

The irony is stark: voters unhappy about the economy and worried about AI took their frustration out on Republicans in the midterm elections — even as AI may be planting the seeds of the faster growth they want. How the boom plays out over the rest of the decade remains to be seen, but the productivity data so far says the optimists have the stronger hand.