US productivity surges to record high

Labor productivity in the U.S. has increased to a record high in 2023 after 15 years of no gains, according to a recent report Bank of America shared with Newsweek, leading strategists to believe the S&P 500 will deliver strong earnings this year.

“We see real evidence of an emerging productivity cycle, driven by the domestic investment cycle after 10+ years of underinvestment,” the report said, adding, “Historically, productivity has increased two years after wage inflation as companies start to focus on improving efficiency via investing in capex.”

Productivity is measured by dividing the outputs—all the goods and services produced in a set amount of time—by the inputs, every hour people worked. After a slump in 2021 and 2022, an increase in the productivity of American workers in 2023 helped deliver the U.S. economy into a “soft landing” rather than falling into a recession, with fewer resources used to produce the same amount of goods and services.

This higher productivity covered for higher labor costs and shielded consumers from price increases, helping inflation to cool down.

Hailing “a new productivity cycle,” Bank of America’s experts wrote, “We are starting to see the fruition of investments made over the past two years, with the S&P 500’s revenue per worker jumping to a record high after 15 years of no gains.”

For the first time since 2008, labor productivity in the country, as indicated by the S&P 500’s revenue per worker, was above the $0.20 mark, adjusted for the consumer price index. This increase has led Bank of America’s experts to raise their estimated earnings per share from $235 to $250, highlighting their optimism for the U.S. gross domestic product’s future readings.

“Our economists raised their 2024 GDP forecast to +2.7 percent YoY (vs. +1.4 percent in November),” the report said.

Workers operating sewing machines at McRoskey Mattress Company in San Francisco on August 9, 2016. Labor productivity in the U.S. has increased to a record high in 2023 after 15 years of no gains, according…
Workers operating sewing machines at McRoskey Mattress Company in San Francisco on August 9, 2016. Labor productivity in the U.S. has increased to a record high in 2023 after 15 years of no gains, according to a report by Bank of America.
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The McKinsey Global Institute reported that between 2005 and 2019, U.S. labor productivity had grown by an average of 1.4 percent, running below its long-term average of 2.2 percent annual growth, which determined the country’s wealth since World War II.

According to the Bureau of Labor Statistics, productivity increased by 2.7 percent in 2023. In the fourth quarter alone, labor productivity grew by 3.2 percent in the nonfarm business sector and by 1.3 percent in the manufacturing sector—more than double the rate from 2005 to 2019.

McKinsey estimated that a return to 2.2 percent—outdone by last year’s results—would have added $10 trillion in cumulative GDP over the next decade. That, the report said, would be the equivalent of every U.S. household seeing a cumulative income gain of $15,000 over the same period.

The Bank of America report said the increase in labor productivity was mainly driven by the resilience of the U.S. economy and advancements in artificial intelligence.

“Productivity gains from AI and domestic investments are also a major tailwind,” the report reads.

According to a previous report by Bank of America, the deployment of AI in several sectors can be associated with GDP gains driven by higher productivity and product enhancement.

“Gains in the services industry, which includes health, education, public services and recreation, could add 21 percent to GDP by 2030,” the report said. “This is mainly due to the healthcare sector, which should see greater personalization and quality improvement in medical advice.”

The report continued, “Transport and logistics, and financial and professional services, are estimated to see smaller GDP gains of 10 percent each due to AI.”